Quote from hajimow:
On The Cover/Top Stories
Only the Paranoid Resurge
David Whelan, 04.10.06
Big mistakes and a small but scrappy rival have humbled Intel. But the fight isn't all gone from the chip giant.
Andy Grove hosted a strategy meeting at Intel headquarters in December. Intel's famously demanding former chief quietly listened to executives politely pondering how Intel's microprocessors will be shaped by trends like Web computing. When the executives filed out, Grove stayed behind for a one-on-one meeting with Patrick Gelsinger, who runs its largest division: desktop and server chips. He's also a Grove protégé.
Grove tore into him. He told Gelsinger that he didn't appreciate sitting through head-nodding meetings that lacked the drama of the old Intel. Where was the shouting? Who was challenging ideas and questioning data? Grove told Gelsinger he better shape up. "He beat the tar out of me for not being confrontational," says Gelsinger.
A creeping mellowness may be to blame for what has become one of the messier periods in Intel's 38-year-history. Last month Intel warned that its first-quarter revenue would be $500 million lower than expected. A month before, Intel revealed that inventories had risen six percentage points faster than sales and that it had lost eight points of market share in high-priced server chips to its archrival Advanced Micro Devices (nyse: AMD - news - people ). Even Google (nasdaq: GOOG - news - people ), which has Intel Chief Executive Paul Otellini on its board, has been buying lots of servers with AMD chips.
Intel now trades at 14 times trailing earnings, its lowest multiple in a decade. AMD has a multiple of 100. Intel polled its employees last year on what kind of bonus package they wanted. It was a vote of no confidence: Lose the stock options, bring on stock grants and cash.
It's AMD, with one-seventh of Intel's revenue, that has been exuding Intel-like cockiness--making predictions that its server processor called Opteron will be in twice as many server designs this year. Since the Opteron debuted in 2003, it has taken 15% of the server market, while Intel's server and desktop business, half of its $39 billion in total revenue, has been almost flat. Henri Richard, AMD's chief of sales, relishes parking his $170,000 Ferrari 430 next to Intel executive Sean Maloney's Toyota (nyse: TM - news - people ) Prius when they overlap at Gold's Gym in Silicon Valley. "Our gains are irreversible," Richard says.
Watch your back, Henri. Intel is getting paranoid again and bringing a rocket-launcher to AMD's knife fight. This year Intel will lap AMD by finally scrapping the old Pentium-chip architecture in favor of a suite of lower-temperature, dual-core microprocessors that consume 35% less power and increase performance by 80%. Intel is also bringing on four $3 billion upgraded chip factories capable of producing chips on silicon wafers that are 2.25 times the size of AMD's wafers and have twice as many transistors per square inch. That leapfrogging should put Intel's gross profit margin, already better than AMD's, still further ahead. "We're more focused and more angry," says Gelsinger. "We're ready to turn the corner and prove naysayers really wrong."
Or to punish AMD with some price cuts. "Every time AMD kisses that 20% market share line that Intel drew in the sand, Intel responds with price cuts," says chip-manufacturing expert G. Dan Hutcheson of VLSI Research.
In mid-March ThinkEquity analyst Eric Ross reported that Chinese motherboard makers were seeing drastic Intel price cuts. The prospect of a price war took AMD's stock price down 7% in one day in March.
Intel hopes to replicate everywhere the success of its mobile and notebook computer division, where sales grew 59% last year to $11 billion, with pretax profit of $5 billion. Traditionally, Intel's prima donna Pentium engineers in Hillsboro, Ore. would outdo each other to set clock-speed records. But they ran into a wall when the last Pentium reached 3.8 gigahertz and was hot enough to bake a scone inside a server. Customers were not impressed with their electricity bills.
AMD leaped at the opening Intel created by rolling out Opteron in 2003, a low-power, high-performance chip for servers now sold by IBM, Hewlett-Packard (nyse: HPQ - news - people ) and Sun Microsystems (nasdaq: SUNW - news - people ).
That's when Intel's notebook design team in Haifa, Israel started to look like the answer to Intel's competitive woes. The Israelis showed with the Centrino mobile platform what a success a lower-power chip could be. It sacrificed speed for features like wireless connectivity and long battery life.
Now Intel is combining its cost advantage over AMD and embrace of cooler chips to take back the high-end server business. David Colesante is the chief technology officer at VeriCenter, a Houston outsourcing company that runs software for 500 customers using 8,000 servers. He has been buying AMD Opteron servers over the last two years to lower his $500,000 monthly electricity bills. But if Intel chips were priced the same as AMD's and ran cooler, he'd come back. "Intel has such a good name and such a good reputation that it's tough to have to go out and work with an AMD," he says.
In March Intel released a new server chip nicknamed Sossaman that burns only 31 watts, one-fifth the power draw of a typical server chip, and, priced at as little as $209, is targeted at customers like VeriCenter and Google that run banks of servers in tandem. Come summer Intel will debut a whole line of similarly low-power chips based on the Centrino laptop design to take on Opteron in all server categories. Intel will be tacking on extra features that corporate buyers crave, such as the ability to remotely access computers and run programs in isolation so that the system is less crash-prone.
Intel is also investing $5 billion in manufacturing so-called Nand flash memory with Micron Technology (nyse: MU - news - people ). Nand memory is hot in devices like the iPod but can also be combined with server processors to boot up computers instantaneously, making Intel-based servers more desirable.
Intel's ability to throw its weight around won it the high-profile Apple (nasdaq: AAPL - news - people ) account, displacing IBM and Freescale. AMD's Richard had no opportunity to bid, he says, because Intel offered to deploy 600 Indian engineers to help make Apple software run smoothly on the new Intel chips.
"That we can go through downturns and come out stronger is the mark of a great company," says Intel's Gelsinger.
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This article actually sums up my reasons for buying some INTC shares. Particularly interesting to see the comparison of P/E ratios of AMD and Intel.
