Intel, Dow’s Best Performer, Seeks to Copy Server SuccessIan King
Since becoming chief executive officer of Intel Corp. 16 months ago, Brian Krzanich has led the chipmaker to the best performance on the Dow Jones Industrial Average, benefiting from an explosion of mobile-Internet use.
The stock has surged 44 percent since he took over in May 2013. That’s mainly due to strength in the unit that makes chips for servers, the data-center computers that power Internet search, commerce and social media.
Under Krzanich, the division has boosted its already considerable share of the server chip market to 98 percent. It’s developed a track record of beating would-be rivals to new markets, taken pains to customize chips for big clients and assigned hundreds of staff to head off competitive threats. The CEO’s challenge now is to translate the server division’s success to other areas, including the unit that has struggled to sign up smartphone-chip customers.
“If you want to know what the new Intel looks like, one place to look is at Intel’s data-center group,” said President Renee James, Krzanich’s second-in-command. “Our vision is that if it computes, it does it best with Intel inside, and our success in the data center is a leading indicator.”
Unlike other older technology companies -- and other parts of Intel -- the server-chip unit is putting startups out of business rather than being threatened by them, pushing into new areas to unseat incumbents and anticipating market changes before they happen.
Instead of waiting to see if Apple Inc.’s watch will create a market for wearables, Intel’s CEO has already shown off multiple products for such devices, from headphones to bracelets. That effort mirrors the server business’s creation of multiple chips for microservers, a segment that still barely registers in the broader industry.
Across the organization, Krzanich is preaching speed and responsiveness to customer demands -- a break from Intel’s past of expecting the personal-computer industry to move at the pace of its innovation. This year the data-center group is doubling its output of parts customized for individual customers, designed to keep those clients -- including Google Inc., Amazon.com Inc. and Facebook Inc. -- from looking elsewhere for server parts.
Fresh in Krzanich’s mind: the server business’s loss of more than 20 points of market share to Advanced Micro Devices Inc. from 2004 to 2006. That has led Intel to breed an organization that may have as many staff dedicated to watching out for competitive threats as some of the companies trying to steal its business have in total.
That lesson was learned again, painfully, by Intel’s main PC-chip division.
“We missed the impact of how big tablets are going to be. Shame on us for that,” Chief Financial Officer Stacy Smith said. “Now we’re off looking even before we know if a market is going to form.”
The server group is doing more than providing a model for other divisions. Its profit helped lead Intel to forecast the third-highest quarterly gross margin in its history for the current period.
In the second quarter, the data-center unit had a quarterly operating income of $1.82 billion on sales of $3.51 billion. It’s also expanding into chips for networking and data and storage equipment that help PC chips take the place of more expensive semiconductors from other companies.
Strength in servers has helped convince investors that Intel is a good bet as mobile devices and cloud services take over computing. Intel’s stock is also the Dow’s best performer so far this year, outpacing even the index’s No. 2 stock for 2014 -- Microsoft Corp. -- by more than 8 percentage points.
Intel has done that even with its mobile and communications unit losing $1.12 billion in the second quarter on revenue of just $51 million as the company pays customers subsidies to build tablets based on its processors.
Processors based on ARM Holdings Plc designs, the same technology that has kept Intel out of the phone market, are at the heart of the latest attempt to break Intel’s grasp in servers.
Companies such as Applied Micro Circuits Corp. and AMD are arguing that cheaper, less power-hungry designs that combine multiple functions will do a better job running some servers than more generic Intel products.
In 2011, Hewlett-Packard Co., Intel’s largest customer, announced a new range called Moonshot that would be focused on more energy-efficient designs. Hewlett-Packard said one version would feature an ARM-based processor designed by Calxeda Inc.
Three years later, Calxeda is no longer in business and Hewlett-Packard’s Moonshot servers are based on Intel or alternatives from AMD that use Intel’s X86 technology. Intel pulled the rug out from under Calxeda by repurposing versions of its Atom chip line for small computers and bringing that to market as fast as it could.
Hewlett-Packard isn’t finished with ARM servers, though, and plans to introduce a new version of the Moonshot range based on an Applied Micro chip later this year.
Intel’s response to the potential threat of ARM machines highlights how the company has changed its approach, said Shannon Poulin, a vice president in the data-center group. Even though Intel’s own forecasts indicated a relatively small market for such low-end servers, it wanted to be sure it was covered in any scenario.
“They’re clearly hyper-vigilant with competitive threats,” said Dean McCarron, an analyst at Mercury Research. “Virtually everything is considered a competitive threat.”
The company’s rivals say it’s just a matter of time before the market begins to turn to other chips, if for no other reason than to keep server-processor prices competitive, according to Paramesh Gopi, Applied Micro’s CEO.
“Nothing has ever survived like this for 20 years,” he said. “There’s no economic dynamic that says it won’t shift.”
ARM servers haven’t hit the market yet because it takes time to prove to customers that the machinery is reliable enough to trust for their vital systems -- something that’s happening now, Gopi said.
The data-center operators themselves might pose a bigger threat to Intel than other chipmakers, said Doug Freedman, an analyst at RBC Capital Markets in San Francisco. In December, Bloomberg reported that Google was considering designing its own server processors based on technology from ARM, according to a person familiar with its plans.
“The biggest threat to Intel is a large data center making a move to something else,” said Freedman.
Intel already has an answer for that, according to Poulin. About six years ago, it won Google as a customer with a version of its Xeon range that was custom-built for industrial machinery to draw less power. Since then, it’s tailored designs for more individual customers and will double the number of such parts to more than 30 this year.
“You don’t just look at the direct competitor,” Poulin said. “You have to look at everything.”
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