Drip
Portfolio Report
Wednesday, February 25, 1998
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Feb. 25, 1998) -- For the past few weeks, the Drip Port's East Coast-originated columns have been about Intel, while on the West Coast some of you are actually having insightful conversations with your neighbor, who is an Intel employee, or you actually work at Intel. I've received thoughtful email from readers about Intel (Nasdaq: INTC) and I'd like to receive more and share it with everyone. If you have anything that you'd like to share regarding Intel's business, please email it to me. Thursday's column will be a collection of thoughts from readers -- your thoughts if you wish. Then we'll move away from Intel.
Today we'll consider the company's competition.
When you mention competitors of Intel, most people think of Advanced Micro Devices or Cyrix before considering any other companies. The larger potential competitors, though, include Motorola, IBM, and even Hitachi. Although none of these companies have the manufacturing capacity to supply the PC industry with all of its microprocessors, these organizations do have the potential of introducing products that could change the CPU landscape. IBM's copper chip technology is one recent example (even though IBM still needs to buy the majority of its microprocessors from Intel and will continue to need to).
Before moving into the topic of competition, though, we need to consider the industry and how it works, especially in relation to Intel.
Intel owns the foundation upon which this industry is built. How did that happen? A technology company such as Intel or Microsoft becomes an entrenched leader -- once it reaches critical mass -- through market forces just as much as it might lead through strong management or anything else. With technology, it benefits everyone to use one agreed upon standard, and to build based on that on standard. By now, you could erase the Intel brand name, but the architecture of personal computer processing is still based on Intel's technology, and the costs of moving to a different architecture would be tremendous for all companies.
The building that other companies are doing using the technology of Intel and Microsoft insures that these companies will continue to lead. Switching costs and compatibility issues increase in stature with time the more that gets built around a certain technology. In technology, more than any other industry, what came before and what everyone is using now, collectively, matters. (This is why Cisco Systems is in such a good position in networking.)
So, what is most likely to change Intel's market position is something that's not even on the horizon now. A small company like Advanced Micro Devices that is always working to keep up with Intel is very unlikely to bring Intel to its knees. It will probably take something completely new, a change in the computing landscape, to wrestle might and earnings power away from Intel. Something as simple as the Network Computer (NC) could do so, though, and that's why Intel is developing such a system using inexpensive Intel chips.
Many technology-centric professionals can't foresee computing architectures moving away from what Intel excels in for at least several decades, so rather than guess what might happen in the computing future, let's assess the current situation between Intel and its foes.
Though I've never been able to find Intel's revenues broken down part-by-part, we know that over 80% of the $25 billion in 1997 revenue came from the sale of microprocessors like the Pentium. So, last year Intel sold about $20 billion worth of microprocessors. Compare this to an estimated $400 million in CPU sales at Advanced Micro Devices, and compare that to Cyrix, a company that didn't have its own manufacturing facilities and was bought for $550 million, lock, stock and barrel, by National Semiconductor. On sales volume, Intel is crushing these two.
Intel has 90% of the CPU market, while AMD is estimated to have 5%, possibly growing to 10%. Companies like IBM and Compaq are the only premier computer makers using new AMD chips in some models, while several second-tier manufacturers like Acer, DEC, and Fujitsu are also using AMD's K6 chip. Still, the sales volume gap is tremendous, and though AMD has the early jump in the sub-$1000 PC market, Intel is fast on its heels. The small lead at AMD is probably not enough to grant the company a maintainable jump in sales or profits.
A greater threat that AMD and other such companies might pose to Intel is that of cloning. Eventually, if producing its own chip-design proves too daunting and not profitable (keeping up with Intel's pace and Intel's price cuts can strangle a company), AMD and others might direct more manufacturing and capital to the cloning of Intel chips. These companies might carve a better niche simply by copying new Intel chips as quickly (and legally) as possible, and then selling them at a lower price than Intel does for the real deal. Just as there is generic soda that takes market share from Coca-Cola, there will always be "satellite" companies that make a dollar by doing what a leading company does but on a smaller, "generic" scale.
Coming full circle, more important than sales volume, market share, or the small competitors, is, again, the technology lock-down. Intel's new Pentium II chip and proprietary Slot1 packaging and motherboard design is already becoming the new standard PC platform. On almost that basis alone, alongside with the well-known capacity issues, the competition is not yet strategically threatening. Aside from capacity constraints, no other CPU company has the clout or market share to cause programmers to write software specifically for its hardware. Intel is the ongoing standard that every company is building upon.
Combine Intel's new segmented PC marketing, its coming high-end workstation strategy with its new Merced chip for 1999, alongside the launch of Windows NT 5.0 and everything else that we've talked about the past few weeks, and the situation for Intel looks quite good. Sure, there are a hundred things that we could bring up that threaten the company, but that's true of any business -- and especially true of a company of such high stature.
Please remember to send your thoughts on Intel, especially if you're in the industry. (Wink, wink.) Below is a list of Intel's primary products and partnerships, excerpted from Hoover's (a subscription is needed for detailed information). Fool on!
--Jeff Fischer
Selected Intel Products
Chipsets:
Core-logic chipsets for Pentium- and Pentium Pro-based computers
Conferencing Products:
Intel Video Phone
ProShare Conferencing Video System 200
Embedded Processors and Microcontrollers:
Memory components
Microcontrollers
Microprocessors
Flash-Memory Products:
SmartVoltage
Microprocessors and Board-Level Products:
Intel Mobile Module
Intel486
OverDrive
OverDrive with MMX
Pentium
Pentium II (Pentium Pro with MMX)
Pentium Pro
Network and Communications Products
EtherExpress LAN adapters
Express Switching Hubs and Stackable Hubs
LANDesk Management Group network management products
LANDesk Management Technology
LANDesk Network Manager
LANDesk Virus Protect
NetportExpress print servers
Selected Alliance Partners:
Compaq (PCs that can receive Intercast Internet TV broadcasts)
Eastman Kodak (digital imaging on PCs)
Microsoft (network PCs and PC videoconferencing products)
Samsung (consumer electronics)
Standard Microsystems (input/output chips)
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