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Intel in slide
Jun 13th 2002
From The Economist print edition


Do disappointing revenues mean Intel's glory days
are over?

THE world's largest chip maker inspires an almost
religious fervour among investors. With over
four-fifths of the market for microprocessors, the
number-crunching chips that power computers, Intel
has a commanding view of the industry, and can
predict every quarter's sales and revenues with
uncanny reliability. This consistency, combined with
annual revenues of $26.5 billion and profit margins of
around 50%, makes Intel an investor's dream. But it
also means the company is unduly punished when it
gets things wrong.

On June 6th Intel
unexpectedly issued a
warning that its
revenues and gross
margins in the second
quarter would be
slightly lower than
forecast. The next
day, its share price
plunged by 18%; it
has since declined
further (see chart). In
part, this reflected
dashed hopes of an
imminent recovery for
the technology sector,
which had been read
into Intel's better-than-expected first-quarter results.
But it also led to speculation that Intel's best days
might now be behind it. Such talk always starts when
Intel stumbles, notes Andrew Norwood, an analyst at
Gartner, a research firm."People are always trying to
say 'this is the end of the Intel monopoly'," he says.
But might they be right this time?

Intel undoubtedly faces a number of challenges. Its
immediate problem is that sales of microprocessors
for PCs, which account for most of its revenues, have
levelled off as the PC industry has matured. After
years of double-digit growth, the number of PCs sold
declined in 2001, and there is little prospect of any
more than slow growth in future. In a flat market,
Intel's rivals, the largest of which is Advanced Micro
Devices (AMD), another American company, can
concentrate on boosting market share. But Intel, with
a share of 81%, has little room to grow.

The company's strategy for reducing its dependence
on the PC market was to diversify into chips for
telecommunications equipment, networking gear,
handheld computers and mobile phones. Sales in all
of these areas are, however, flat or declining. Intel
has dabbled elsewhere, including in digital cameras
and broadband-access equipment, but to no avail. Of
its $26.5 billion of revenue last year, $20 billion came
from microprocessors, and most of the rest came
from memory chips.


A bit better

Intel is now pinning its hopes on Itanium, a 64-bit
microprocessor that handles data in larger chunks
than its 32-bit Pentium chips. This makes Itanium
suitable for use in powerful servers, mainframes and
supercomputers-markets in which sales volume is
lower, but margins are fatter. So far, however,
Itanium has failed to impress. The first version of the
chip, launched a year ago after a decade of
development, was woefully slow, and sales were
unimpressive. Itanium 2, which will be launched next
month, runs twice as fast.

To exploit Itanium's 64-bit capabilities, however,
computer makers will have to design entirely new
machines around it, and software companies will
have to produce new versions of their programs. This
is starting to happen, but it will take some time.
Itanium is unlikely to provide a surge in revenues any
time soon.

Meanwhile, perhaps the greatest threat to Intel is
competition from AMD, whose Intel-compatible
microprocessors are increasingly popular with PC
makers and buyers. The two firms have traded blows
over the years, with Intel's market share falling from
88.5% in 1997 to 76% last year, before rebounding
to its current 80% or so. This suggests that a steady
decline in Intel's market share is not inevitable. Much
of AMD's increase in market share has come from
price-cutting. With a research and development
budget six times the size of AMD's, Intel ought to
have no trouble keeping its smaller rival at bay. But
there is trouble brewing in the form of AMD's 64-bit
chip, called Hammer, which will be launched later this
year.

Technically, it is unfair to compare Hammer to
Itanium, says Dean McCarron of Mercury Research, a
market-research firm. Hammer is a 64-bit version of
AMD's existing 32-bit chips, and is intended for use in
desktop machines and low-end servers. Itanium, in
contrast, is an entirely new design, intended for
high-end computing. The problem for Intel is that
Hammer is very fast, and can run existing 32-bit
software and new 64-bit software side by side.
Itanium is slower and less flexible when running
32-bit software. Nor is it intended for use in desktop
machines.

The nightmare scenario for Intel, says Mr McCarron, is
that PCs based on the Hammer chip will eat into the
market for Intel's Pentium chips. No doubt AMD's
marketing department will make much of the fact
that Hammer is 64-bit, while the Pentium is only
32-bit. The obvious thing for Intel to do would be to
respond with a whizzier, 64-bit version of the
Pentium. Such a chip is said to be under
development, just in case. But the launch of a 64-bit
Pentium would undermine the case for Itanium, and
cannibalise its sales. Hammer thus poses an indirect
threat to Itanium.

Intel's huge resources mean it could survive even the
failure of Itanium, which is a distant possibility. The
company's size enables it to finance developments
that no rival can. So big are its revenues and margins
that even if it lost 20 percentage points of market
share and ten points of margin, says Mr Norwood, it
would still be in an enviable position.

In short, Intel is likely to maintain its position at the
top of the industry for some years to come. But when
you are at the top, the only way is down.

Quelle: Economist

<ul> ~ http://www.economist.com/business/displayStory.cfm?story_id=1182435&CFID=4866827&CFTOKEN=44c590b-aae669a1-4ba6-4a2b-b4d0-b96ad7696442</ul>
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