The Hulk Haunting Cell Phones

Intel's Manitoba chip is just the start of its wireless dream

The chip is code-named Manitoba--and it may well herald a realignment of the cell-phone business. On Feb. 17, Intel Corp. (INTC ) showed off the new cell-phone chip at a wireless conference in Cannes, France. While Intel played down Manitoba's significance, the world's No. 1 chipmaker is clearly dedicated to moving into the fast-growing market for the chips that will power the next generation of cell phones. As Ronald Smith, general manager of Intel's Wireless Communications & Computing Group, told rivals and customers at the Cannes trade show: "We're aiming at where the market is going."

A latecomer to the wireless chip segment dominated by Texas Instruments Inc. (TXN ), Intel is nonetheless haunting the $60 billion cell-phone industry. While rivals and phonemakers alike say that the king of semiconductors for PCs lacks sufficient prowess in wireless technology, they know that Intel's size and its longtime relationship with Microsoft Corp. (MSFT ) could position it to make big gains.

It's not as though Intel has a choice. With the functions of the PC and cell phone expected to merge over the next half-decade, Intel must either master wireless technology or lose out in its core microprocessor market. Says Merrill Lynch & Co. chip analyst Joseph Osha: "This is not a company that, when it has an opportunity to grab something, says: `Oh, we're not interested."'

Indeed, Intel has grand wireless ambitions. Manitoba is only the beginning. As early as November, the company is expected to launch a more sophisticated successor. Over the next couple of years, Intel's goal is to grab greater share by providing the brains for cellular phones. Such devices increasingly sport features more common to PCs, such as high-speed Net access, digital photography, and video. Longer term, Intel aims to add wireless and cellular technology to notebooks. The chipmaker can't delay: Already Fujitsu Ltd. (FJTSY ) and Dell Computer Corp. (DELL ) are building PCs that allows users to connect wirelessly to the Internet.

So how will Intel win over cell-phone makers? Today, it's their leading provider of memory chips, which perform such simple functions as storing phone numbers. Intel is also making inroads selling them microprocessors, which they've begun adding to high-end handsets that can surf the Web and play video and audio files. Motorola Inc. (MOT ), for example, went with an Intel processor for its recently introduced A760, a Net-capable cell phone. But with the next iteration of Manitoba, Intel will really be pushing the convenience of one-stop shopping: It will combine memory and processor with the ability to transmit voice all on one chip.

Doing so, however, could mean huge changes for the cell-phone business. Right now, contract manufacturers of phones buy chips with the different functions from a variety of suppliers. If they could buy everything from Intel, they'd be able to sell their phones more cheaply and quickly to carriers. It's already starting: On Feb. 18, Intel announced that three European carriers--Britain's mmO2, Spain's Telefónica Móviles (TEM ), and France Télécom's (FTE ) Orange unit--will buy phones made by contract manufacturers built on the Manitoba chip.

That could make the cell phone more like the low-margin, commoditized PC industry--meaning an onslaught from Intel could be a disaster for traditional handset makers. Nokia (NOK ), the world's largest phonemaker, may face the biggest threat. The Finnish company tightly controls the software, hardware, and design of its handsets, which allows it to sell them at a premium. But if Intel and Microsoft (MSFT )--the Wintel alliance--eat into cell phones, Nokia's profits and business model could be at risk.

Of course, it's hardly a slam dunk for Intel. It has had technical problems with a wireless chip for PCs. For now, analysts believe TI will continue to dominate. It too plans to launch a single-chip package in late 2004, although the combination will be less threatening to Nokia, its largest customer.

Still, Intel has plowed more than $12 billion into state-of-the-art plants in the last two years, and the company has an $11 billion war chest. If potential rivals aren't worried now, they may be looking over their shoulders before too long.

By Cliff Edwards in Santa Clara, Calif., with Andy Reinhardt in Cannes, and Roger O. Crockett in Chicago

— With assistance by Andy Reinhardt, and Roger O Crockett

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