Poor Intel Journalism
Intel's "cut-throat" multi-billion-dollar biz

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (May 5, 1999) -- "National Semiconductor (NYSE: NSM), reeling from tougher competition with No. 1 chip maker Intel Corp. (Nasdaq: INTC), said Wednesday it would exit the cut-throat PC chip business and focus on chips for smart appliances and its core analog chip business."

Those words were written by Reuters and dozens of other newswires and journalists across the country.

Yes, National Semiconductor is bailing on the PC chip business that it jumped into as recently as 1997 with its ill-fated purchase of Cyrix Corp. for $550 million. At the time of the Cyrix acquisition, the popular media wrote that the new company threatened Intel's dominance [insert snicker here, if you'd like to laugh in retrospect]. Instead, National Semiconductor has hardly been on the PC map -- or any map -- and has been bleeding redder than the Red Sea.

So, now the company is exiting the extremely cut-throat PC chip business. Cut-throat. Brutal. Fierce. In effect: unattractive. Those are the words that everyone is using to describe the industry.

That's poor journalism.

Cut-throat is a term you might safely use to describe the disk drive industry, where not a single company is making billions of dollars per year. Cut-throat can even be applied to the bookselling industry, where a company makes a few percent in annual profits, typically only in the fourth quarter, and a few giant retailers lead the less than dynamic industry with consistently low margins. Cut-throat is typically used to describe an industry that has everyone bleeding on some level, or very close to it.

Ladies and gentlemen, Intel is not bleeding. The industry that Intel dominates with great skill is not a cut throat, dog-ugly, bow-wow industry. Not for Intel. The truth of the matter is, instead, that no other company -- not NSM nor Advanced MicroDevices (NYSE: AMD) -- does chips better than Intel. No other company has been able to yield as many chips per wafer as Intel and get them into as many PCs as Intel. If another company could, it might benefit from what is still an attractive industry.

Intel has some of the highest margins of any business. Intel's margins rank it in the top 10% of all businesses, and that will hold true again this year, and almost certainly next year and the year after, given the new higher-end, more expensive chips rolling off Intel's lines. Profit margins of above 25% do not indicate a cut-throat industry. It might, as it does in this case, represent an industry dominated by one company, but not a cut-throat industry. There's a very significant difference between the two.

Advanced MicroDevices continues to lose money not because the industry has brutally ugly dynamics, but because it isn't good enough. Intel can make money even when selling Pentiums and Celerons very cheaply. And Intel should be able to continue making money in years ahead because its yields per wafer should continue rising. Even if Intel sells a chip for $50 and it represents 25% of a PC's price in three years (meaning a new PC is a very low $200), Intel could conceivably clear a profit on the chip. Meanwhile, its real profit driver is -- and is going to be -- its high-end server chip business. So Intel has the important bases covered and can make do on the low-end, too.

Meanwhile, how is the largest remaining competitor in the PC chip biz, AMD, going to survive if it is losing money while chip prices are steadily declining? If AMD can't be efficient enough to make money now, amigo, it ain't going to make money down the road unless it greatly improves its production efficiency. The problem resides, however, in the fact that however efficient AMD becomes, Intel will probably be even more efficient and charge lower prices.

Is that cut-throat? Sure. But is the industry cut-throat? No. A cut-throat industry is unattractive for every company involved. Intel is one of the most highly-valued companies in the world. It got there because it dominates what has been, and should continue to be, a worthwhile industry to pursue.
Some journalists need to be more precise with their definitions. It seems that they all love National Semi, or else they prefer to be lazy with analysis. When National Semi bought Cyrix the common cry was, "Look out Intel!" Now that National has been defeated beyond doubt, the stock rose 21% today partially because Journalists are writing, "It's good that National Semi is getting out of this cut-throat industry." (As if it had a choice now.) The truth is that NSM failed. It failed to capitalize on what has been a tremendous industry that is dominated by Intel. If we could short NSM and AMD in a DRP, we'd consider it. We would have considered it long ago, as we wrote in 1997.

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