No Nerd at Intel's Top? Heresy!

The CEO-in-waiting, Paul Otellini, is a master marketer

As a teenager, Paul S. Otellini set up an elaborate pulley system from a cliff in the Sierras so that he, his brother, and a cousin could drop right into Lake Tahoe. The pulley worked smoothly. But Otellini didn't factor in his weight. A few feet in the air, the rope snapped, and Otellini landed on the rocky shore, fortunate to escape injury.

Clearly no engineer, Otellini was sensible enough to pursue a career in sales and marketing. Yet in January, the 52-year-old exec was appointed president and chief operating officer of an engineering powerhouse, Intel Corp. (INTC ) He will share power with CEO Craig R. Barrett until Barrett retires in the next two years. Then, Otellini is expected to become the fifth CEO in the giant chipmaker's 34-year history--and the first with no degree in engineering.

His climb to the top signals new challenges for Intel, Otellini will lead the chipmaker into a host of new markets, from cell phones to telecommunications transmitters. Breaking into those segments requires every bit as much marketing savvy as engineering.

And Otellini, while soft-spoken, has proven a master marketer. With the "Intel Inside" slogan in 1991, he guided what has been one of high-tech's most successful branding efforts. Indeed, his marketing helped to transform Intel's chips, long a hidden cog of the machine, into the ballyhooed brains of the PC. "He has come of age from having accomplished so much," says Intel Chairman Andrew S. Grove.

A 28-year veteran of the company, Otellini has long been the velvet glove to the fist employed by Barrett and taskmaster Grove, Intel's former CEO. Otellini, by contrast, doesn't issue orders. Instead, he prods employees to think up solutions.

The question is whether Otellini, with his low-key style, can lead Intel through one of the biggest makeovers in the company's history. After failed efforts in consumer electronics and running Web operations for other companies, Intel is focusing on its core strength, making tiny slices of silicon to power everything from handheld computers to telecom gear. Under Barrett's tenure, Intel has spent $12 billion on 50 companies to win a foothold in these markets.

If Intel fails to drive up sales and earnings in the next two years, Otellini could well face pressure to back off from Barrett's plan. The numbers are grim. On Oct. 15, the company reported revenue for the third quarter ended Sept. 28 was flat year over year, at $6.5 billion. Lehman Brothers Inc. expects 2002 revenues to fall to $26.3 billion, down 1% from 2001's weak $26.5 billion. Intel did post earnings of $686 million, up from $106 million last year. But Lehman predicts 2002 earnings of $3.2 billion, a 13% drop from $3.7 billion last year. Today Intel's stock hovering around $15, near its 52-week low. Already, the company is cutting capital spending to $4.7 billion, down from the original $5.5 billion target. If the economy worsens, the chipmaker may face its third round of layoffs in the past two years.

For growth, Otellini will lean heavily on his marketing smarts. He'll have to convince skeptics that newcomer Intel has the chops to be a major player in industries now dominated by the likes of Texas Instruments (TXN ), Sony (SNE ), and others. Otellini says Intel has a winning proposition. By squeezing more functions onto a single chip, for instance, Intel vows to simplify phone and handset manufacturing. This should allow manufacturers to keep lowering prices--a must in maturing markets where customers need to be enticed to buy.

Otellini also has some ground to make up. He will have to tackle bad publicity surrounding the initial launch of Intel's Itanium server chip. Four years late, the high-end chip has been slow to gain customer acceptance, in part because Intel developed cheaper chips that were faster than the more expensive Itanium.

He has had plenty of time to hone his management skills. As a young executive sent to manage Intel's Folsom (Calif.) plant in 1987, Otellini had to deal with two unrelated employee suicides within a short spell that shook workers. In a company where execs scoff at touchy-feely sentiments, colleagues still recall Otellini's deft touch. He set aside time to talk to employees and brought in counselors. It was then that Grove began grooming Otellini for larger roles.

A strict Catholic upbringing and working-class roots helped shape Otellini's management style. Deeply religious, his father David pointed his two sons toward the Church. Otellini's brother, Steven, became a priest and is a monsignor at a Kentfield (Calif.) Catholic prep school. "Paul's very methodical and has a clear idea of what he wants--always trying to have fun doing it," he says.

In college, Otellini studied economics at the Jesuit-run University of San Francisco, while holding down jobs at a clothing store and in the purchasing department of a slaughterhouse. After getting his MBA at the University of California at Berkeley, he wanted to remain in the Bay Area and found "this really neat" new technology that was transforming the orchards and farms south of San Francisco into Silicon Valley. Indeed, Otellini loves San Francisco so much that shortly after buying a spread in tony Los Altos Hills, he sold it to move his family back to the city.

Today, Barrett and Otellini complement each other in the two-man executive suite. On the business side, Barrett crisscrosses the globe touring Intel's 12 factories and meeting with foreign dignitaries and customers. Otellini has taken on much of the day-to-day operations, including setting quarterly budgets and strategy. "Look at me as sort of Mr. Outside. Look at Paul as Mr. Inside," Barrett says.

Their personalities are just as different. In his early years, Barrett carried a baseball bat into meetings to remind subordinates to stay on point. Salesman Otellini, with his Zen-like manner, challenges employees to stretch. Sandra K. Morris, Intel's chief information officer, recalls that in 1997 Otellini led the charge to connect the company to its customers via the Web. Morris was astounded when Otellini suggested setting an internal goal of doing $1 billion in Web transactions within 12 months--a target that was easily hit. "He has this quiet way of conveying his enthusiasm, and you get excited with him," she says.

Colleagues also note his offbeat sense of humor. Shortly after the introduction of the Pentium chip, word spread like wildfire about a flaw that produced errors in complex math calculations. Otellini struggled to calm angry clients--but managed to find humor in it. A former executive recalls him walking into meetings, joking: "So-and-so just kicked my ass on the phone. Pardon me if I don't sit down."

These days, Otellini is busy pushing a subtle change in Intel's marketing posture. Instead of assuring people that they need ever-faster chips, he wants Intel to offer chips that satisfy a variety of needs. The new Banias chip, for instance, will be slower than Intel's current notebook chips, but it will include a built-in wireless modem, pack more memory, and use less battery power.

His predecessors had fabled technical skills that built Intel into a chip giant. Now, Otellini has to prove that his marketing savvy can lead Intel into a new era of growth.

By Cliff Edwards In Santa Clara, Calif.

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