Intel Corp

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INTEL CORP.

The world's largest maker of microprocessors, Santa Clara, California-based Intel Corp. also is one of the five most profitable manufacturing companies of any business sector. In 2000, the firm posted earnings of $10.5 billion on revenues of $33.7 billion. Although Intel spent considerable effort attempting to move into new markets—such as communications and networking equipment and Internet hosting services in the late 1990s—it essentially remained a PC chip maker, with an 80-percent share of the market in 2001.

EARLY HISTORY

In the late 1960s, the co-founders of Fairchild Semiconductor, Gordon E. Moore and Dr. Robert Noyce, became dissatisfied with the level of financial support they were receiving from their owners. Despite the firm's status as the largest semiconductor company in the world, Moore and Noyce left Fairchild in 1968 to found NM Electronics, which was based on a one-page business plan developed by Noyce. NM Electronics was later renamed Intel, from the first syllables of "integrated electronics." Early products included a new high-speed RAM device, LSI semiconductor memories, and a metal oxide semiconductor chip. In 1972, Intel released an eight-bit microprocessor known as the 8008. Two years later, it introduced the 8088, the world's first general purpose microprocessor, which quickly became an industry standard. By 1975, sales had reached $135 million.

SHIFT FROM MEMORY CHIPS TO MICROPROCESSORS

In August of 1981, IBM selected the 8088 chip for its new personal computer line, which helped to launch the PC revolution when it was shipped. The following year, IBM acquired a 12-percent stake in Intel for $250 million. However, these shares were later sold. By the mid-1980s, Intel had become the tenth-largest maker of semiconductors. It was then that Intel's management decided to shift gears, reducing the company's focus on memory chip operations in favor of the more profitable microprocessor market. Part of this restructuring involved the layoff of 6,000 employees. Intel introduced its revolutionary 80486 microprocessor in 1989. By the end of the decade, Intel had moved its way up to third place among the world's leading semiconductor makers.

Intel's aggressive advertising campaign, centered around the "Intel Inside" logo, proved successful as the company's earnings exceeded $1 billion for the first time in 1992. The following year, Intel released its Pentium processor, which could execute more than 100 million instructions per second and was five times more powerful than its latest 486 microprocessor. In 1994, when the Pentium microprocessor was discovered to make calculation errors under certain conditions, Intel discounted the problem as minor. However, increasingly negative public relations prompted the firm to replace the chips with new ones at no additional cost to customers. As a result, the firm took a $475 million pretax charge. Despite the setback, sales that year grew 31 percent to $11.5 billion. By then, roughly 80 percent of the world's PCs ran on Intel's processors. In 1996, the firm unveiled 150-megahertz and 166-megahertz Pentium models, which were significantly faster than the 133-megahertz model. Revenues soared to $25 billion in 1997. Making its most expensive acquisition to date, Intel paid $40 million for competitor Chips and Technologies Inc. in 1998.

ATTEMPTED SHIFT FROM MICROPROCESSORS TO NETWORKING AND INTERNET TECHNOLOGY

According to a March 2000 article in Business Week, "After 10 years of 30 percent-plus compound annual growth, Intel hit a milewide pothole in 1998. Earlier attempts to expand into new businesses such as modems and video conferencing had gone nowhere. Then falling PC prices, computer industry consolidation, and increased competition piled on top of one another, causing Intel's revenue growth to slow to 5 percent, while earnings declined for the first time in a decade." A major blow to Intel had come in February of 1997, when Compaq Computer Corp. released a PC powered with a Cyrix Corp. microprocessor for less than $1000. Soon thereafter, other PC manufacturers began manufacturing their own lines of inexpensive PCs, leaving room for rivals like Cyrix and Advanced Micro Devices (AMD) to market their less expensive microprocessors.

Eventually, Intel decided to develop its own series of microprocessors for inexpensive PCs. Intel named the line Celeron. Chips for more costly servers and workstations were grouped together under the name Xeon. The firm also realized that it could no longer rely on the PC industry as its sole source of profits. As a result, it began diversifying beyond central processing units into things like flash memory chips—those used in digital cameras, handheld computers, and cell phones—and other networking and communications devices. In January of 1999, Intel began offering Internet services such as Web hosting.

A multi-billion dollar acquisition spree included the purchase of Dialogic Corp., IPivot Inc., and Parity Software Development Corp. The firm also paid $1.6 billion for wireless technology maker DSP Communications Inc. and $2.2 billion for broadband device chipmaker Level One Communications Inc. That year, Intel released a series of chips for networking and communications devices that help to power the Internet. At the time, the market for such devices was growing roughly 30 percent faster than the PC market. In an effort to gain access to emerging technology, Intel began investing in upstart software and Internet firms. By 2000, the company's Intel Capital arm had poured roughly $1.2 billion into ventures such as eToys and Inktomi.

Along with efforts to diversify, Intel also continued developing faster microprocessors, such as the Pentium III, a 1 gigahertz (GHz) processor introduced in early 2000. Rival AMD unseated Intel as the maker of the world's fastest chip with its less expensive 1.2 GHz Athlon processor, unveiled in February of that year. Intel's efforts to regain its title with a slightly faster chip failed when the firm was forced to recall that chip in August. However, in November Intel released the Pentium IV, a 1.5 GHz chip.

Growth via acquisition continued as the firm paid $1.25 billion for Denmark-based GIGA A/S and $450 million for Basis Communications Corp. Intel also bought computer telephony solutions provider Picazo Communications Inc. In addition, the firm announced its intent to begin selling appliances such as set-top boxes for televisions via Internet Service Providers (ISPs), screened telephones via telephone companies, and network servers for Web applications.

Despite Intel's bold plans to reinvent itself as a networking and communications technology provider, in 2001 revenues declined for the first time in approximately 10 years. One reason for the lower revenues was a price war initiated by Intel. In September, in an effort to wrest lost market share back from rival AMD, Intel unveiled its 2 GHz Pentium IV processor at a price much lower than normal for a new release by the firm. It also reduced prices on its other Pentium products by an unprecedented 40 percent. While the price cuts helped to bolster market share, they also reduced revenues. Another problem, according to BusinessWeek Online columnist Cliff Edwards, was that Intel's diversification efforts had not begun to pay off. "Intel's new businesses—everything from Web hosting to processors for phones—have reaped zilch in profits, with losses doubling every year since 1998." Although some analysts recommended that Intel abandon many of its diversification efforts—particularly in the Web hosting industry, which saw major players like Exodus Communications bail out in the wake of the dot-com shakedown—the firm decided to forge ahead, hoping to be well positioned for the industry's eventual rebound.