Intel Will "Continue to Run Faster"

Incoming CEO Paul Otellini says that's how the giant chipmaker will deal with rivals like AMD who are coming on strong

Paul Otellini may have one of the shortest honeymoons in the history of corporate successions. On Nov. 11, the board of chipmaking goliath Intel (INTC ) announced that its 54-year-old president will become the fifth CEO of Intel starting next May. A 20-year Intel veteran, Otellini doesn't have a lot of time to settle into the job. The chipmaker is facing the most challenging time since it first came to dominate the semiconductor business in the mid-1980s (see BW Online, 11/18/04, "Getting Intel Back on the Inside Track").

This year, Advanced Micro Devices (AMD ), a perennial second banana, grabbed a technology lead and some market share from Intel with a new line of 64-bit chips. That has put pressure on key Intel allies Microsoft (MSFT ) and Dell (DELL ) to look harder at the products of surging AMD.

Beyond that, Intel has suffered a series of missteps, as several product delays and manufacturing problems have dented its reputation for operational excellence. The problems became so worrisome last July that current Intel CEO Craig Barrett fired off a memo to employees stressing the "need to improve our performance."

On Nov. 17, Otellini swung by for an in-depth chat with BusinessWeek editors and correspondents. Here are edited excerpts from the conversation:

Q: What's your challenge as CEO?


Job No. 1 is to get the company growing again. We want to continue to be the No. 1 chip company. There's always a No. 2 coming after you. There's a different No. 2 now. Samsung wasn't on the radar five years ago. They're a very aggressive, very confident company. We need to make sure we keep our eyes focused there.

We have some businesses that are not profitable. We need to get them on the right side of the [profit-and-loss statement]. As we move to platforms, we need to do a good job of embedding communications technologies into those platforms and capitalizing on those investments we've made in communications.

Q: What's the platform strategy?


For the first three decades of the company, we mostly made discrete chips. But they weren't designed to be used together for the most part. And they certainly weren't marketed together. They were marketed out of a catalog. All of those efforts were focused on the performance of the chip.

Increasingly, all of our design activities are aimed what I call platforms, that are focused on what I think are the major growth opportunities for semiconductors, or at least our flavor of semiconductors. There are four of them. One is in mobile computing. We're doing similar designs for the digital home where we want the PC to be the centerpiece of the home for consumption, archiving, and display of information and entertainment.

A similar one in enterprise is to improve the economics of being a chief information officer. We can embed better features for security or manageability or productivity in terms of down-the-wire upgrades into our platforms. The fourth is in handhelds. This one is a bit farther away than the other ones. It requires some discontinuities in technology to happen.

Q: How do you respond to AMD, which has stolen the tech spotlight from you?


Continue to run faster. Our overall market share hasn't changed much. It hasn't changed much this year. They've made some strong inroads in servers. Our job is to come up with a better server line.

Our advantage relative to them is threefold. First of all, technology and capacity, where I believe we have a strong lead. Second, platform architectures. And [we have] the ability to create scale and a mass market, which they don't really have. If my theory on platforms is right in other markets, that will be our sustainable advantage.

Q: What's your take on the state of tech demand?


It's encouraging to see our customers doing well around us now. That's a good light beam.

Q: But where are we in the tech cycle?


We all got a bit confused by the robustness of the fourth quarter last year. Everyone was up higher than they expected. Part of it was coming off three years of recession. You want to believe this is the beginning of good times. The first half of this year was good -- but not as strong as we expected. So everyone entered into the second half of the year very cautiously. You're seeing a normal seasonality play out in the second half.

Q: What do you make of recent comments from Dell Computer that they're more seriously considering AMD?


They make those comments kind of annually. If you were in their position, you'd be crazy not to look at everything available. It's our job to sell them as much as possible.

There probably is some pressure on them. I suspect people offer them very good deals. The issue is, can we continue to offer them a compelling overall package? It's a very expensive proposition for them to change their business model by adding another supplier. I believe Dell has always chosen wisely.

Q: Microsoft recently announced that a new version of its server software will not run on servers built on your Itanium chip and will instead use chips from AMD. What does this say about your relationship with Microsoft?


The relationship with Microsoft is better now than it's been in a long time because our business models are much more aligned now. If you look at how Microsoft positions itself in operating system in servers, it is much more growing up from the bottom. And going after the high end of AIX, HPUX, Solaris is an ambition of theirs but they are not there today in terms of the overall market they address.

Itanium, while they are supporting it, they are not supporting it in clustered configurations (bundled servers). Turns out most clusters today are Linux. Supercomputers are on Linux. Itanium is doing well on Linux and in supercomputers. So while I am not terribly thrilled about this economic choice, I understand it. So we'll continue to push Itanium on the high end on other operating systems. And that makes sense for people like SGI, for HP for the Japanese computer manufacturers, all of whom have high-end versions of Linux or UNIX out there or their own proprietary versions.

Q: What's the future of the Itanium chip?


Itanium is showing success in the high end, not in the mid-range. So we're focusing product development, marketing, and software efforts on greater than four-way systems. For a while, we had ambitions to drive it down to two-way servers and workstations. It just doesn't work in terms of the economics of the low end of the industry.

Long term, the architecture Itanium needs to aim at is [IBM's] Power line. We have nothing in our existing 32-bit line capability that can compete with Power. It's a very high performance line requiring liquid-cooling capabilities. The mainframe isn't dead. That's where I'd like to push Itanium over time.

Q: What are you doing in China?


China is our second-largest country market today. And it's the second-largest country market for computers in the world today. It's on a path to pass the U.S. this decade. So as a single-market opportunity, it's enormous. You have to have a presence. We have got factory infrastructure there, R&D facilities, and large-scale sales and marketing. We're north of 5,000 people in China today. We need to continue to develop our resources there to participate in the market, and there's a talent pool there.

Q: Is the move against expensing stock options going to be one of your big priorities?


We will expense next June unless the Eshoo-Boxer bill [California Democrats Senator Barbara Boxer and Representative Anna Eshoo] goes through, which says, "Hey, guys, take three years and figure out the accounting before you do this."

You get dramatically different answers [depending on what accounting model you use]. To me, it raises all the more questions about the viability of the accounting. That's the most troubling aspect of this. Accounting used to be a science. All balance sheets have estimates, but this is dramatically different.

Q: Where does Intel stand on broadband policy?


Our policy hasn't changed. Broadband was always viewed by us a being a limiter to our deployment of computing. Even today, the lack of a broadband policy is hurting us from a competitive standpoint. Not so much for business, but for small business or consumers, we're behind. Where we have broadband it tends be DSL. In Japan and China, you tend to get 10 to 20 times that speed for the same price. The broader the band, the better.

Q: What role should the government play?


I'd like us to adopt a much broader-based set of policies in general that improve our competitiveness. Broadband is one of them. Education is another. I was bristling over the debates running up to the [Presidential] election over outsourcing. Outsourcing isn't the issue. Outsourcing is a result of not being competitive.

If we don't change the debate to what it takes for the U.S. to compete with faster-growing economies, we aren't dealing with this issue. And broadband is just an element of that.

Edited by Edited by Spencer Ante

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