In determining its path to a profitable future, Intel Corp. faces what other companies have faced before: the fundamental question of focus.
Should Intel focus on core competencies, even if that’s in cooling markets, or should it endure a slide in earnings and stock value to reinvest in a growing market where it has invested heavily, yet not done well to date? Intel has dominated the market in making Pentium processors for PCs, a cooling market, but it has not made significant inroads in the mobile baseband and application processor markets, which are forecast to grow along with mobile handset sales.
The story has acquired intense interest, in part, because of Intel’s size (nearly 100,000 employees, nearly $39 billion in annual revenues), its phenomenal success in creating and supplying microprocessors for the PC industry and the tantalizing possibilities and pants-scorching perils in the growing mobile-phone industry.
The urgency of the issue is underscored by a long slide in Intel’s stock price. Last week, while semiconductor stocks collectively took a beating, Intel’s shares hit a new, three-year low of $17.33. And the issue itself was raised in April when Paul Otellini, Intel’s president, responded to poor first-quarter financial results by declaring his company would conduct a thorough, 90-day review of its operations to restructure and resize for a return to robust profitability. That period is nearly over and speculation about Intel’s next move has hit fever pitch.
Much of the Wall Street-centric reporting on rumors of Intel’s exploration of a possible sale of some elements of its business have focused on questions such as When? Who? How much? Industry analysts who spoke to RCR Wireless News last week suggested that the range of options is broad, as is the range of viewpoints on likely scenarios.
One viewpoint questions whether Intel has something of value to sell. Further, how many companies can afford to buy Intel’s mobile chip business at typical multiples of annual revenue? Will Intel sell at a fire-sale price to a smaller rival, and quickly put the uncertainties behind it? Though the theme of corporate self-definition and focus is familiar, Intel’s structure and its physical assets are so intertwined, the devil will be in the details to construct a do-able deal.
“Let’s talk about the application processor business,” said ABI Research’s chip analyst, Alan Varghese. “Around 1999-2000, Intel saw the PC market maturing and that’s how they got into wireless communications and networking. If you look at their Xscale processor, they haven’t made significant inroads into the market. I think the incumbents, like Texas Instruments, stayed their ground and didn’t let Intel move in. So, I don’t know why someone would buy the business for a technology that hasn’t done well. If a semiconductor company wants access to qualified, baseband-type of people, this would be a good time to engage in talks. But I don’t see much reason to buy a unit that hasn’t done well in the market.”
Varghese said that Intel understood computer processing well, but the energy efficiency and radio-frequency transceivers required by cell phones were better understood by rivals with more focus on and longer experience in the mobile industry.
According to Forward Concepts’ principal, Will Strauss, speculation has focused on the possible sale of Intel’s business built around its Xscale processor chip for cellular phones and PDAs and its IXP network processor chip for VoIP. The Xscale product is a RISC processor chip (reduced instruction set computer) that also provides application processing in some cell phones and is the basic computing element in PDAs.
Texas Instruments and Qualcomm Inc. are the dominant players in application processors, according to Strauss, with Intel a distant third with about 7 percent of the market for application processors with a high-level operating system (such as Linux, Symbian or Windows Mobile) running on it. At a typical sale price of three to five times annual revenue, only Samsung and Texas Instruments could afford to buy it; in Strauss’ view, Intel and Samsung compete too closely in PC processors for discussions to take place, and TI would not be interested. “In that view, you’d have to sell at a deep discount just to cut your losses,” Strauss said. Analog Devices and Broadcom, smaller competitors, might be able to afford a $100 million “fire sale” price tag in cash, because the Intel technology actually complements their own, he said.
“Basically, an Intel executive once told me, `The Pentium chip is like a creosote bush in the desert; it puts out a chemical that doesn’t allow anything to grow around it,”‘ Strauss said. “Now that the PC market is slowing down, they’re looking at anything that’s going to be as big as the PC market, and that’s the cellular industry. But they did a miserable job in getting a baseband chip on the street-that’s the heart of all cell phones. They probably invested close to $5 billion-that’s with a big `B’-in that market for no return, yet. Actually they do have a baseband on the market, but it eats too much power. So either they want to continue, because it is going to be the only market as big as the PC market in the future, and continue throwing money at it, or do they just cut it.”
“I have no inside information on this situation,” said Len Jelinek, a director and principal analyst at iSuppli Corp. “I’d simply compare it to recent events in which companies have focused on their core competency.” Jelinek held up the example of Motorola Inc., which in 2004 shed its chip division, Freescale, in order to focus on handsets and networks. The two parted ways with a supply agreement that kept Motorola in chips while getting Freescale off its books, with the freedom to innovate on its own. Motorola has since accelerated in market share and innovation and Freescale appears to be thriving.
“Intel is doing the same thing, determining its core business going forward perhaps three years, five years out. Once you determine that, then structure follows strategy,” Jelinek said. “The good news is that whatever Intel decides to do, it will be done logically and strategically. That’s got everyone in the investment community-everyone, actually-into a frenzy over `what are they going to do and when are they going to do it.”‘
The essential complication for Intel, according to Jelinek, is that its Flash memory business, its processor business and its chipset business are entwined not just on the corporate balance sheet but physically as well, on manufacturing campuses with enormous, shared overhead. Slicing up its business to sell assets and operations is not a simple matter. And it is by no means a foregone conclusion that Intel will sell off anything; it may well decide to gird for the long haul and reinvest in efforts to tackle the staggering growth market represented by the wireless industry.
