“Only the paranoid survive,” Intel Corp. Chairman Andy Grove said in September while in Chicago to promote his then-new book by that title.
“I worry about other people figuring out how to do what we do better or cheaper and displacing us with our customers,” he wrote in his preface.
The book’s subtitle, which sounds a bit ironic in the face of problems that have hit Intel over the past few weeks, is “How to Exploit the Crisis Points that Challenge Every Company and Career.”
Recent events have given Grove and Intel, the world’s dominant manufacturer of chips for personal computers, a raft of crisis points to exploit. Three of the biggest are:
– Digital Equipment Corp., one of Intel’s biggest customers, filed suit in Massachusetts in mid-May charging that Intel’s latest Pentium II chip is based on patents that Intel illegally took from Digital.
The resulting confrontation has led Digital to hint that it will press federal authorities to explore antitrust actions against Intel. Digital, which now sells $2 billion a year worth of Intel-based computers, said last week that it will start buying chips from Intel’s competitors instead.
– In late May, one of the biggest of those competitors, Intel’s longtime foe Cyrix Corp., introduced a Pentium II competitor called M2 that was immediately snapped up by a number of one-time Intel customers for use in low-cost “Pentium-killer” personal computers for the home and office network markets.
Cyrix has been in and out of court with Intel for more than a decade in complex patent suits, but experts say there is little chance Intel will be able to block the M2 in court, as it had other Cyrix attacks.
– Even as the Cyrix M2 was entering the market, the trade journal PC Magazine was completing tests on another major threat to Pentium, a competing chip from Advanced Micro Devices called the AMD K6 that virtually matched Intel’s hottest 233 Mhz Pentium at roughly half the cost.
“For the first time in 25 years of microprocessor development, a new Intel chip is in a competitive fight,” the lab report concluded.
Always before, experts noted, Intel has been roughly an entire generation ahead of its competition. When Cyrix and AMD were selling so-called 386 chips, Intel’s huge complex of factories churned out 486 devices.
A similar progression occurred when Intel went to 586 and called it Pentium.
But now, note experts like Charles Piller, director of computer testing for the trade journal PC Week, a real battle is shaping up for domination in the next generation, the so-called 686 (Intel calls this Pentium Pro or Pentium II).
And this time it’s something of a digital donnybrook, with Cyrix and AMD challenging Intel at the leading edge.
Intel shareholders have watched the company’s stock slide as markets react to the complex factors swirling about the company that is by far the world’s most important source of microprocessors for desktop personal computers.
A variety of analysts agreed in interviews that Intel now has encountered one of its toughest sets of challenges ever from low-cost competitors.
None of the experts suggested that Santa Clara, Calif.-based Intel is in anything like life-threatening trouble, but the huge company stands alongside Microsoft Corp. as a bellwether that often drives high-technology stocks, so even small glitches attract big attention.
“When Intel catches cold, the stock market sneezes,” said Mike Feibus, principal analyst with Mercury Research Inc., a Scottsdale, Ariz., microprocessor industry research group.
The current sniffles hit in late May, seeing Intel stock dip from its 52-week closing high of $169.31 on May 27, to a Friday close of $144.75, dragging much of the high-tech market down with it.
The bad news that touched off the drop included both major initiatives from competitors and Intel’s disclosure of a surprising setback in European sales.
Business expansion in Europe has failed to reach projected levels, and the result will be less-than-anticipated purchases of Pentium-based computers abroad, Intel told analysts on May 30.
These factors have combined to force Intel to reduce its earnings forecasts a bit, although the company insists that huge profits will continue into the foreseeable future.
Putting Intel’s situation into some perspective was a report by Salomon Brothers, in which the investment house responded to the news from Europe by saying it will continue to rate Intel stock as a “hold,” but was lowering the earnings forecast for the year to $8.50 a share from $8.90.
Then, late last week, Intel’s short-term revenue problems appeared to grow when industry analysts from the Ziff Davis trade magazine house reported that the company has drafted a plan to cut prices on its Pentium MMX line of chips by at least 35 percent to counter undercutting by competitors.
Many observers had expected the price cuts, because Intel now is in the process of converting its product line from the Pentium MMX line of chips to the new Pentium II, a process requiring it to retool factories.
While that retooling is under way, the company must obtain revenues from chips stockpiled in anticipation of the makeover.
“Intel remains a terrifically solid company, but it is true that there is more activity and more threats from the rest of industry than the company has seen for a very long time,” said Linley Gwennap, publisher of Sunnyvale, Calif.-based Microprocessor Report, a leading analyst of the industry.
The company has spent more than a decade building factories in the Pacific Northwest and the Southwest that run continuously to produce the chips needed to meet the world’s huge demand for personal computers.
Gwennap noted that even as upstarts Cyrix and AMD proffer chips for certain market niches, only Intel’s huge industrial complex has the capacity to turn out the millions of Pentium-class chips in the wide variety needed to run today’s mix of laptops, desktops, workstations, servers and other computers.
Because of that huge installed base, Intel controls well above 80 percent of today’s chip market, just as Microsoft’s Windows operating system dominates the software scene.
The resulting hegemony often is called Wintel, and analysts Feibus, Gwennap and others agreed that the Microsoft/Intel powerhouse will continue to dominate well into the future.
With investors flocking to take advantage of the computer boom, the two companies attract stock play far greater than do much larger companies. As a result, the ups and downs of Intel and Microsoft are watched very closely.
A widely quoted study by Edward Macheski of Berkshire Capital, a New York-based money management company, underscores the massive attention that stock traders pay to the nation’s two personal computing giants.
Macheski reports that the combined stock market value of Microsoft and Intel exceeds the combined market value of General Motors, Ford Motor, Boeing, Eastman Kodak, Sears, J.P. Morgan, Caterpillar and Kellogg. Through Friday, Microsoft and Intel had a combined market capitalization of nearly $274 billion; the others combined were just under $235 billion.
These eight long-established corporate giants, however, have collective revenues of more than $400 billion, or 14 times the roughly $30 billion combined sales of Microsoft and Intel in their most recent fiscal years.
Gwennap cited the “sheer size” of Intel and said, “There is no way that the competition could replace Intel in any major way anytime soon.”
“It took Intel years to build the complex of factories necessary to produce the volume of chips necessary for today’s world,” Gwennap noted.
“Nobody is going to just come along and replace them.”
