"This Is Not The Intel We All Know"

The giant has fallen behind in chips for multimedia -- and investors aren't happy

For years, Intel Corp.'s (INTC ) aggressive chip-delivery schedule has been as predictable as, well, Moore's Law. The chipmaker consistently doubled the number of transistors on a processor every two years, just as the man said.

Lately, though, Intel's road map -- the delivery schedule it uses to let customers know when new products will hit the market -- has taken as many twists as an Alpine pass. Over the past eight months, Intel has suffered a string of delays and manufacturing snafus. The latest occurred on July 29, when it said a speedy new 4-gigahertz Pentium chip due by yearend would be delayed until 2005. It's enough to make investors grouchy -- and put CEO Craig R. Barrett on edge. "This is not the Intel we all know," he e-mailed employees, "and that is not acceptable."

Why is Intel overpromising and underdelivering? The problems stem from mistakes made five years ago in the design of its Pentium chip. Execs misjudged, believing PC makers and consumers would continue to embrace ever faster, power-hungry chips. Now the latest iterations are ill-suited to today's corporate desktops, as well as the new multimedia home PCs that are the focus of a major Intel push this year. Intel says the problems are only temporary. "We continue to expect to exit the year with the vast majority of our desktop and notebook processors on the [new] technology," says spokesman Robert Manetta.

Still, Barrett and President Paul S. Otellini, who runs day-to-day operations, are playing catch-up. That has led to manufacturing glitches as overworked engineers scramble to design chips that will support everything from better sound and personal video recording to shuffling multiple video streams around the house. Manetta acknowledged the schedule may have been too aggressive.

Intel's plan faces delays because the current Pentium desktop chip design is outdated -- and, in fact, poorly suited for consumer electronics. One big problem, say PC makers: The latest version of the Pentium 4 draws too much power and therefore produces too much heat. Until it can fix the heat problem, PC makers can't install the chips in their machines.

Those challenges have been compounded as Intel adopts new manufacturing technologies. The shift has allowed the company to churn out huge numbers of chips -- but not the high-end ones PC makers had been promised. As a result, Intel has racked up big inventory gains as Dell Inc. (DELL ), Hewlett-Packard Co. (HPQ ), and others slowed purchases of older chips in anticipation of the new ones that have yet to arrive. PC makers are loath to criticize their main supplier, but a spokesman for one leading manufacturer says Intel's blown deadlines have "royally delayed things. Computers we had planned for November now have been pushed to January."


Investors aren't happy with Intel's performance, either. The stock is stuck at about $24, well off its 52-week high of $35. Some believe Intel is pushing too hard and too fast into chips for digital home electronics, a sector that the likes of Texas Instruments Inc. (TXN ) and Philips Semiconductors know more about. Instead, they argue, Intel should stick with less exotic PC and server chips and expand overseas. Others are pressing Intel to hand back some of its precious $14 billion cash hoard. "I'd rather have [a] payoff than have Intel venture where they don't have competency," says Peter Hofstra, senior analyst with AIC Ltd., which holds about 355,000 Intel shares. Intel CFO Andy D. Bryant has said such an option is possible.

Others say Intel must press ahead. In the past six months, Advanced Micro Devices Inc. (AMD ) has gained ground in consumer PC chips, winning about 50% of desktop PC sales, according to researcher Current Analysis. AMD is making inroads into server chips, too. "We've become a credible competitor to Intel," says AMD Chief Technical Officer Fred Weber. "We've been executing very well."

What can Intel do to solve the problems? Otellini has cancelled further iterations of the Pentium 4 and told engineers to rush a cooler-running PC chip, but it won't be available until late 2005. In the meantime he hopes to offset AMD's gains by boosting share in other chips and components that will go inside a range of entertainment devices, many of which can't run on a Pentium. The risk is that Intel could again miss the mark and alienate its customers. But given the high stakes, it's a bet execs are willing to take.

By Cliff Edwards in San Mateo, Calif., with Olga Karif in Portland, Ore.

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