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The Intel Hustle

As the PC market matures, the goal the chip maker has set for itself--that of choreographing an entire industry--will take some fancy footwork.


But such principles are costly to uphold when your rivals are pocketing millions of dollars in marketing money. Both IBM and Compaq have since returned to the Intel fold, which today includes all of the top manufacturers of computers that use Intel chips.

Increased visibility is not without its pitfalls. Even Grove admits that the company was caught off guard by the consumer backlash that ensued when a flaw was discovered in Intel's flagship Pentium processor several years ago.

At first, Intel angered consumers by refusing to replace the defective chips. The company finally relented, but the flap became a lasting dent in a brand that has become one of the most widely recognized in the high-tech industry.

Dennis Carter, the Intel executive who crafted the "Intel Inside" campaign, says that among home PC buyers, awareness of Intel's products has soared from 20% in 1992 to 80% in 1996. And the premium consumers are willing to pay to have an Intel-based machine, he said, is "in the hundreds of dollars."


Intel was founded in 1968 by Silicon Valley legends Robert Noyce, who invented the silicon microprocessor, and Gordon Moore, who predicted that microprocessors would double in power every 18 months.

But despite that heritage, Intel still needed a big break to pull away from the pack of semiconductor companies. That break came in 1981, when Intel's 8088 processor was chosen by IBM for its first PC.

"Intel built this self-perpetuating money machine based on the initial profits from being in the IBM PC," said Linley Gwennap, editor of the Microprocessor Report in Sunnyvale, Calif. "Instead of throwing a party, they threw all that money back into building more factories and designing better chips."

The company built new plants so fast that even though the PC industry has grown about 18% annually for the last decade, Intel still holds about 85% of it--and has hardly left an unclaimed crumb for rivals.

Today, those rivals couldn't catch up even if they wanted to. Intel's $4.5-billion expansion budget this year is more than double the combined revenues of its closest rivals, Advanced Micro Devices Inc. and Cyrix Corp.

Those two companies are still in the chase: Both unveiled chips earlier this year that closely match the performance of Intel's flagship Pentium line of microprocessors at lower costs. That kind of price pressure from rivals, analysts say, is expected to erode Intel's gross profit margins from 64% today to about 50% in the long run.

But Intel's production capacity is so much greater and its grip on leading PC makers so tight that even rivals acknowledge that hopes of upending the giant are unrealistic.

To take on Intel, "you don't just come in with one silver bullet," said Vinod Dham, a former Intel executive who now heads the microprocessor division at AMD. "You have to have silver bullets lined up one behind another."

So AMD has decided to avoid shootouts and dwell in Intel's shadow, selling chips at the lower ends of the market. AMD's goal now, Dham said, "is coexisting."

But dominance creates unique vulnerabilities for Intel, because the only way for the company's growth to continue is for the entire industry to keep expanding.

"When you have the market share they have, trying to crush the competition isn't going to help," Gwennap said. "Which is why it's more important for them to keep the market growing."


Intel's blue-and-white buildings poke up out of a mundane stretch of apartments, gas stations and light-industrial structures at the southern tip of the San Francisco Bay.

Inside, employees occupy cubicles that continue to shrink in size as the staff, which now numbers 57,000 worldwide, continues to grow. Even Grove and Barrett sit in cubicles, although theirs haven't shrunk and have windows that offer views of the taller rides at the nearby Great America theme park.

Late last year, however, Grove's search for new uses for PCs took him to the epicenter of flash, the I.M. Pei-designed headquarters of Hollywood's Creative Artists Agency.

Surrounded by celebrities, including Jennifer Aniston and Woody Harrelson, Grove unveiled a laboratory designed to be a showcase of new entertainment technologies. The lab looks like a living room, except that it's stocked with computers and technology powered by Intel chips.

On a promotional video, Danny DeVito talks of the promise of the emerging technologies to give artists new ways to express themselves and, "best of all, [make] more money."

Intel hopes to transform the PC into every home's primary appliance for entertainment, information and communications--all things that require heavy processing power. To speed that evolution, Intel has quietly become one of the industry's biggest corporate venture capitalists.

Intel's investment program didn't exist five years ago. But today, its portfolio includes about 100 companies, is worth about half a billion dollars and doubles in size every year, said Les Vadasz, director of corporate business development.

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