Among the questions facing Intel in its biggest reorg in years: What to do with all these networking products

Craig Matsumoto, Editor-in-Chief, Light Reading

May 4, 2006

5 Min Read
Will Intel Trash Telecom?

With Intel Corp. (Nasdaq: INTC) preparing a sweeping reorganization, the company might have to make some tough decisions when it comes to its communications efforts.

Intel will go through 90 days of review before launching the reorg, which CEO Paul Otellini announced on April 27. So, it's early to start declaring what Intel should keep or chuck. But its telecom-related products seem a particularly apt sector for soul-searching, since so many observers have wondered over the years whether Intel really belongs there.

"Intel has to decide if they want to be a serious player in the communications market," says Linley Gwennap, principal analyst with The Linley Group .

Otellini promised the reorg will leave no division unprobed. (Ouch.) "What we plan to do is a very deep analysis, go through operation by operation," he said in a presentation to analysts last week. The goal is to cut spending by $1 billion, or roughly 8 percent. Headcount is expected to drop 2 or 3 percent, but through attrition, not through massive cuts -- at least, that's what Intel has said so far.

His decision was spurred by increasingly tough competition from processor rival Advanced Micro Devices Inc. (NYSE: AMD) and lackluster first-quarter earnings reported last month: profits of $1.3 billion, or 23 cents per share, on revenues of $8.9 billion, compared with profits of $2.2 billion, or 34 cents per share, on revenues of $9.4 billion a year ago. (See Intel Reports Q1.)

Some are drawing parallels to Intel's 1980s transformation, when it ditched commodity memories and turned into a microprocessor company -- a move that worked out, one could say.

Intel declined to comment for this story, pointing out that the 90-day review is in its first week. And Otellini did tell analysts that the company had no preconceptions, saying, "We don't go into this knowing the answer."

Veteran Intel watchers aren't convinced the company will give up on communications, but some changes might be in order. "If they want to be in the comms space, they have to look at how to be a major player in this market, to the extent of a Broadcom Corp. (Nasdaq: BRCM) or Marvell Technology Group Ltd. (Nasdaq: MRVL) or Texas Instruments Inc. (NYSE: TXN)," says Linley. That may mean making a big acquisition somewhere, thereby picking up a cluster of executives who understand the networking-chips space better than Intel's home-grown teams do.

Intel's communications acquisitions have mostly been small, many coming around the year 2000. They were driven by then-CEO Craig Barrett, who pegged networking as Intel's next growth driver, prodding Intel to get into businesses like network processors, Sonet/SDH chips, and optical transceivers. (See Intel To Acquire Optical Chipmaker, Intel Swaggers Into OC192 Market, Intel's 10-Gig Shopping Spree, and Intel Capital Still Looking for Deals.)

Of course, the dotcom bubble popped, and some of those acquisitions have quietly gone away. But what really tripped up the strategy was trying to "force those companies into the Intel Way," Gwennap says. "If they were really serious, they'd have to bring in some people who know about the comms business and let them do their thing."

Network processors, arguably the most prominent of Intel's networking products, still show some promise -- "I'm not sure that's one of the areas they would want to cut," says Needham & Co. analyst Charlie Glavin, noting that Cisco Systems Inc. (Nasdaq: CSCO) has shown some short-term interest in Intel's IXP family of chips.

The problem is, Intel had to back off from high-end network processors, which haven't formed into much of a market. (See Intel Isn't Through With NPUs.) Intel is finding success in DSLAMs and access boxes, competing with the likes of Wintegra Inc. But with network processors only a $175 million pond to begin with, according to The Linley Group, Intel has to consider whether a fraction of that market is worth fighting for.

"For a company the size of Intel, you can't just keep segmenting your market down and down until you find a niche you can succeed in," Gwennap says.

Intel also has its optical transceiver and tunable laser products. But optical components have been a tough market, and at OFC/NFOEC in March, executives from companies including Intel questioned whether stubbornly low optical margins could continue to finance R&D in the sector. (See Smiles Abound at OFC/NFOEC.)

On a panel preceding OFC/NFOEC, Intel vice president Gary Wiseman pointed out several emerging markets where Intel sees prospects, including transceivers for 10-Gbit/s Ethernet and 4-Gbit/s Fibre Channel, and the growing use of tunable lasers. He also noted Intel is working on optical interconnects related to the computing industry.

That last point -- up-and-coming research -- could pose more tough questions for Intel. Because of its resources, the company has created research projects all over the place, in "spaghetti on the wall" fashion, Glavin says. He's particularly fond of Intel's silicon-laser experiments, which involve pumping a silicon chip with photons -- taking advantage of the famed Raman effect [ed. note: so it's more like noodles on the wall] -- to produce a laser. (See Intel Claims Laser Breakthrough.) That kind of R&D should have a place, even if it's tough to see how it could lead to revenues, he says.

"Everything is kind of interesting, and if Intel in their restructuring says certain things are primary research, and should be treated like a VC portfolio, that's fine," Glavin says. "My big concern is that Intel, in the process of restructuring near-term, kills a lot of primary research that could be very strong."

— Craig Matsumoto, Senior Editor, Light Reading

About the Author(s)

Craig Matsumoto

Editor-in-Chief, Light Reading

Yes, THAT Craig Matsumoto – who used to be at Light Reading from 2002 until 2013 and then went away and did other stuff and now HE'S BACK! As Editor-in-Chief. Go Craig!!

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