February 16, 2000 Web posted at: 8:27 a.m. EST (1327 GMT) by Ephraim Schwartz and Dan Neel

From...

(IDG) -- As the industry continues to evolve in the wake of the Internet explosion, Intel is redefining the role it will play in the computing marketplace and for its customers. To the casual observer, it might seem that the microprocessor giant is stuck in a business model that requires its customer base to buy ever faster chips in perpetuity even as the market for faster chips is fading.

But in reality, when you look more closely at the interplay among the company's many divisions, new products, research efforts, and investments -- and the new Internet economy -- there is a business strategy shift in motion: Intel's business model requires it to expand its customer base, which will buy ever faster and more various chips.

The company's recent activities challenge the impression that Intel is a chip company alone. Certainly its new Intel Online Services (IOS), as well as its newly formed Communications Product Group, point to a company that is focusing on finding solutions for emerging e-business problems.

True to its new mission statement "to be the pre-eminent building block supplier to the worldwide Internet economy," Intel is now involved in everything from flash memory and set-top boxes to desktops, servers, routers, network interface cards, and switches. The company is building a framework into which all of its far-flung efforts will fit, and that framework will now capitalize on the Internet rather than on the PC revolution. It will also expand Intel's role in IT purchases to include broad infrastructure components.

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Yet both insiders and outsiders are quick to point out that most of Intel's revenue still comes from making microprocessors for the computer industry.

"CPUs, chip sets, [and] motherboards are the $25 billion piece of the $30 billion pie," says Richard Dracott, director of e-business marketing for Intel's architecture division.

And it is that simple fact that allows industry analysts to still consider Intel's relationship to the desktop market important.

"I'm not sure competition from any company is Intel's biggest problem. A bigger problem is generating demand for its faster, more profitable desktop chips," says Keith Diefendorff, a senior analyst at MicroDesign Resources, a research company in the Silicon Valley.

But the chip-making giant appears to get it, according to one new-economy economist at the University of Texas, in Austin.

"One could say that no company can survive in this new Internet economy without constantly reinventing itself," says Andrew Whinston at the Center for Research in Electronic Commerce. "From an economic point of view, the economy is under major reconstruction."

Reviving the fundamentals

No one argues that faster servers will be unnecessary some day, but another oversimplification is the idea that, at some point, IT executives will no longer need to follow the traditional Intel road map for at least desktop and mobile systems.

Although MicroDesign's Diefendorff says he sees the Internet as a bandwidth-dominated rather than a processor-dominated environment, when you talk to senior IT executives, bandwidth or not, they remain loyal to the Intel processor road map.

"Shell is investing significantly in desktop computers in an effort to dramatically reduce the cost of ownership for IT infrastructure. Lock it down, shut down divergence from standards, [and] centralize decision making on infrastructure in an effort to save a pot full of money," says T. R. Web, advisor to the CIO at Shell, in Houston. "While we recognize the post-PC world is coming, at hand, [or] whatever, we are still going to buy a lot of desktops in the next two years."

And the same loyalty is apparent in the mobile market.

Steve Pintarich -- a service delivery coordinator at Computer Sciences Corp. (CSC), an outside IT management group for such companies as Otis Elevator and Raytheon -- deploys hundreds of Dell Latitude series laptops and also believes in the Intel road map.

"[SpeedStep] is the next step, and we're always looking at what's available to give our users the most current technology," Pintarich says.

Intel's Dracott concedes that things are moving beyond the desktop, but that "[Intel will] move at a faster speed needed to empower employees."

"The model here is to support a broad range of clients, cell phones, PCs, and thin clients," Dracott adds.

But if Intel has an Achilles' heel in its core markets, some analysts say it may be in the high-end servers that both enterprise-level businesses and ISPs are demanding to run their e-commerce-focused data centers.

"Unix on an Intel box is not a first choice," says Linley Gwenapp, a principal analyst at The Linley Group, in Mountain View, Calif.

Intel servers are not currently able to satisfy the performance requirements of e-commerce, Gwenapp says. And Intel appears to understand that "big hulking servers," as Intel CEO Craig Barrett calls them, are needed to fuel the new economy.

So over the past two years, Intel has moved 50 percent of the research-and-development dollars spent on microprocessor research from IA-32 processors to IA-64. The big push starts in the second half of 2000, when the first Itanium processor ships.

IA 64 Merced is about to ship, followed by McKinley in the second half of 2001. McKinley will incorporate at least a 2MB on-die Level 2 cache, and have three times the bus bandwidth of the first Merced chip, coming in at about 6.4GB per second.

Gwenapp believes that giving IT executives a choice between a proprietary box from Sun or IBM and an Intel box offered by multiple suppliers will change things.

"Above and beyond technology is the business model," says Gwenapp. "If an IT manager buys Sun e4000s, they just married Sun. If price-performance gets out of line or Sun falls behind, they are in trouble. [But] if they don't like what Compaq is doing, they have Dell or IBM."

There is no doubt an expanding server market is critical to Intel's health. The Xeon [Intel's current server chip] is about 15 percent of Intel's processor revenues, and it comes from 4 percent of processor units, according to MicroDesign Resources.