The Intel Hustle

SANTA CLARA, Calif. — Wearing a glittering gold suit and tinted mask, Andy Grove assumed perhaps the most precarious position of his career: standing before an audience of thousands while holding one foot in the air.

Then he stomped it down, and suddenly lights came up, music thumped and Grove--the 61-year-old chief executive of Intel Corp.--was the lead dancer in a parody of the company’s disco-themed ad campaign.

The stunt delighted a crowd gathered to hear him deliver a keynote speech this summer at a convention of computer game makers. And certainly Grove has reason to dance.

Intel is in the midst of a breathtaking run. Profit--$5.16 billion last year--has nearly quintupled since 1992 and ranks among the highest of any company in the United States. Its microprocessors are the brains of 85% of the world’s computers. The company’s stock price has soared about 750% in the last five years.

Along the way, Intel has become one of those rare American companies that looms even larger than its statistics. Its stock is a bellwether for the computer industry. And its Santa Clara campus is a mecca for techies from around the world.

But when asked about this tide of good fortune, Grove has a predictably paranoid response: “I cringe.”

Indeed, as he leads a company that has been growing so fast for so long, Grove must now find a way to keep the dance going. To accomplish that, he is counting on Intel’s ability to become the choreographer for an entire industry.

No longer merely the world’s largest maker of microprocessors, Intel has transformed itself into the industry’s most powerful marketing presence, a giant financier of new personal computer technologies and--as Grove’s trade show appearance demonstrates--the industry’s most tireless advocate.

The stakes are huge. Every year, Intel ratchets up its multibillion-dollar budget on new plants and equipment that won’t produce microprocessors for years, creating enormous pressure to make sure somebody will be waiting to buy all those chips.

Any hiccup in the growth of the PC industry can be terrifying. And sources of indigestion are mounting: Intel’s longtime alliance with Microsoft Corp. is fraying, rival chip makers are showing newfound spunk, and some Silicon Valley giants are aiming to displace the PC altogether.

“The threat to Intel,” Grove says, “is momentum.”

The responsibility for handling this threat falls primarily to Grove and Intel President Craig Barrett.

As chief executive of Intel for the last decade, Grove has increasingly played the role of visionary, and much of Intel’s transformation is according to his design. Grove’s elfin smile makes him seem an executive at ease, but his management philosophy is summarized by the title of his recent book, “Only the Paranoid Survive.”

Barrett, 58, heads Intel’s vast manufacturing operations, which stretch from China to Israel. Barrett, an avid outdoorsman who spent 17 years as both student and professor at Stanford University, helped make Intel’s plants the most productive in the industry. His promotion to president earlier this year established him as Grove’s likely successor.

To maintain Intel’s growth, Grove and Barrett have devised a strategy that sounds deceptively simple but that taps the extent of Intel’s vast resources.

“Everything Intel does,” Barrett says, “is targeted toward creating new users and new uses for the PC.”

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Intel would seem an unlikely marketing powerhouse. After all, the company makes a product most consumers have never actually seen and typically don’t understand. Until about 1991, the company didn’t even bother with consumer marketing.

But this year, Intel will spend about $900 million on advertising--triple the sum spent by Microsoft--on a program considered one of the most successful in the high-tech industry’s history.

The most obvious components of the program are the “bunny people” ads that feature disco-dancing Intel workers wearing brightly colored “clean” suits. The ads are so popular that the company has introduced bunny people dolls.

But the bulk of Intel’s marketing money isn’t even spent on its own ads.

More than 80% of Intel’s budget--or about $750 million this year--goes toward reimbursing computer companies for the cost of their ads, according to Bradley Johnson, technology editor of Advertising Age magazine. The best way to sell more microprocessors, Intel believes, is to sell more computers.

Participating computer makers are reimbursed for two-thirds of the cost of a print ad and half the cost of a television ad, as long as their spots feature the Intel logo and their machines bear “Intel Inside” stickers.

Some PC manufacturers have chafed under this program, because it eclipses their own brand identity. Compaq Computer Corp. and International Business Machines Corp. pulled out of the program in 1994, and Compaq even took a swipe at Intel in its 1995 annual report.

“When it says Compaq on the outside,” the cover of the report said, “you don’t need to worry about what’s on the inside.”

But such principles are costly to uphold when your rivals are pocketing millions of dollars in marketing money. Both IBM and Compaq have since returned to the Intel fold, which today includes all of the top manufacturers of computers that use Intel chips.

Increased visibility is not without its pitfalls. Even Grove admits that the company was caught off guard by the consumer backlash that ensued when a flaw was discovered in Intel’s flagship Pentium processor several years ago.

At first, Intel angered consumers by refusing to replace the defective chips. The company finally relented, but the flap became a lasting dent in a brand that has become one of the most widely recognized in the high-tech industry.

Dennis Carter, the Intel executive who crafted the “Intel Inside” campaign, says that among home PC buyers, awareness of Intel’s products has soared from 20% in 1992 to 80% in 1996. And the premium consumers are willing to pay to have an Intel-based machine, he said, is “in the hundreds of dollars.”

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Intel was founded in 1968 by Silicon Valley legends Robert Noyce, who invented the silicon microprocessor, and Gordon Moore, who predicted that microprocessors would double in power every 18 months.

But despite that heritage, Intel still needed a big break to pull away from the pack of semiconductor companies. That break came in 1981, when Intel’s 8088 processor was chosen by IBM for its first PC.

“Intel built this self-perpetuating money machine based on the initial profits from being in the IBM PC,” said Linley Gwennap, editor of the Microprocessor Report in Sunnyvale, Calif. “Instead of throwing a party, they threw all that money back into building more factories and designing better chips.”

The company built new plants so fast that even though the PC industry has grown about 18% annually for the last decade, Intel still holds about 85% of it--and has hardly left an unclaimed crumb for rivals.

Today, those rivals couldn’t catch up even if they wanted to. Intel’s $4.5-billion expansion budget this year is more than double the combined revenues of its closest rivals, Advanced Micro Devices Inc. and Cyrix Corp.

Those two companies are still in the chase: Both unveiled chips earlier this year that closely match the performance of Intel’s flagship Pentium line of microprocessors at lower costs. That kind of price pressure from rivals, analysts say, is expected to erode Intel’s gross profit margins from 64% today to about 50% in the long run.

But Intel’s production capacity is so much greater and its grip on leading PC makers so tight that even rivals acknowledge that hopes of upending the giant are unrealistic.

To take on Intel, “you don’t just come in with one silver bullet,” said Vinod Dham, a former Intel executive who now heads the microprocessor division at AMD. “You have to have silver bullets lined up one behind another.”

So AMD has decided to avoid shootouts and dwell in Intel’s shadow, selling chips at the lower ends of the market. AMD’s goal now, Dham said, “is coexisting.”

But dominance creates unique vulnerabilities for Intel, because the only way for the company’s growth to continue is for the entire industry to keep expanding.

“When you have the market share they have, trying to crush the competition isn’t going to help,” Gwennap said. “Which is why it’s more important for them to keep the market growing.”

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Intel’s blue-and-white buildings poke up out of a mundane stretch of apartments, gas stations and light-industrial structures at the southern tip of the San Francisco Bay.

Inside, employees occupy cubicles that continue to shrink in size as the staff, which now numbers 57,000 worldwide, continues to grow. Even Grove and Barrett sit in cubicles, although theirs haven’t shrunk and have windows that offer views of the taller rides at the nearby Great America theme park.

Late last year, however, Grove’s search for new uses for PCs took him to the epicenter of flash, the I.M. Pei-designed headquarters of Hollywood’s Creative Artists Agency.

Surrounded by celebrities, including Jennifer Aniston and Woody Harrelson, Grove unveiled a laboratory designed to be a showcase of new entertainment technologies. The lab looks like a living room, except that it’s stocked with computers and technology powered by Intel chips.

On a promotional video, Danny DeVito talks of the promise of the emerging technologies to give artists new ways to express themselves and, “best of all, [make] more money.”

Intel hopes to transform the PC into every home’s primary appliance for entertainment, information and communications--all things that require heavy processing power. To speed that evolution, Intel has quietly become one of the industry’s biggest corporate venture capitalists.

Intel’s investment program didn’t exist five years ago. But today, its portfolio includes about 100 companies, is worth about half a billion dollars and doubles in size every year, said Les Vadasz, director of corporate business development.

The program has two objectives, Vadasz says: “How can we accelerate development of new market segments and strengthen our own sales?”

Some of Intel’s investment efforts have been duds so far. The company has for years invested in technologies that use the power of microprocessors to speed up digital communications over ordinary phone lines.

“It hasn’t happened yet,” Vadasz acknowledges.

But others are already paying off. As an example, Vadasz cites Intel’s recent investment in Avid Technology Inc., whose software is used in video post-production work. Until recently, Avid’s software was primarily designed for Macintosh computers, which don’t use Intel chips.

“But with our investment and our involvement, they are adapting to the PC,” Vadasz said.

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Intel’s rivals acknowledge the company’s deft marketing touch, its technological prowess and mastery of microprocessor production. But many say there are also more unsavory reasons for the company’s dominance.

Jerry Rogers, founder of Richardon, Texas-based Cyrix, said Intel quashes competition by threatening to withhold products from customers who seek other suppliers for their chips.

“Their actions haven’t changed a lot from when I started competing with Intel in 1972 as a product manager at Texas Instruments,” said Rogers, who left Cyrix last year. “The bottom line is they were tying products and intimidating customers. It’s a cultural problem with them.”

Intel is also notoriously litigious, having sued many of its rivals repeatedly in cases that critics say are designed primarily to intimidate and hinder competitors.

Intel itself was hit with a legal torpedo earlier this year when Digital Equipment Corp., a maker of high-performance microprocessors, filed a sweeping lawsuit accusing Intel of stealing trade secrets. Many analysts concluded that Digital was largely trying to give Intel some of its own medicine.

Intel retaliated by threatening to cut off Digital--which also makes computers--from future Pentium products and by filing a countersuit that accuses Digital of pilfering technology.

Critics say there is no bigger bully than Intel, but Barrett greets such charges with a shrug.

“Intel competes very hard in the marketplace,” he says. “If you don’t like competing against Intel, you can call it anything you want, but we play hard and I think we play fair.”

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After more than a decade of dependable PC market growth, technology currents are shifting, and the industry is increasingly chaotic.

Intel’s longtime ally Microsoft recently made peace with archenemy Apple Computer Inc. and seems increasingly enchanted by devices--such as Internet boxes for television sets--that don’t use Intel chips.

Intel’s rivals are showing new life. Cyrix recently merged with National Semiconductor Corp., and together they aim to dominate the market for hand-held devices and other new “information appliances.” AMD recently scored a small coup when its latest chips were selected by IBM for use in some of its PCs.

And some of the most powerful companies in the high-tech industry--including Sun Microsystems and Oracle Corp.--are wielding a new computer language called Java that they say will enable PCs to be replaced altogether by cheaper network computers that need not be powered by Intel microprocessors.

If Java fulfills its promise of allowing software to run on any chip, then Intel loses one of its greatest advantages: the fact that most of the world’s software is designed to run only on its line of microprocessors or others built to imitate them. Breaking that lock could open the field to different breeds of processors that some analysts say are better suited for a Java world, including chips now used in game players and the StrongARM chip developed by Digital Equipment.

Grove perceives threats not so much in any independent source, but in their aggregation. Intel can handle most any challenge, he said, but what if the chaos of the industry paralyzes consumers, causing them to put off their purchases until someone sorts this mess out?

“You’ve got NCs, NPCs, Java and Active X, browser wars--choices everywhere,” he said. “Our job is to make sure that whatever happens ends up on some version of the Pentium platform. It’s almost like you throw up a bunch of leaves and then the wind comes and you have to get them all into the proper alignment.”

For a choreographer, that’s a nightmare.

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Inside Intel

Intel Corp. has seen enormous growth this decade, with sales tripling over the last five years and profits nearly quintupling.

SALES

In billions

1996: $20.85

EARNINGS

In billions

1996: $5.16

Source: Bloomberg News

Researched by JENNIFER OLDHAM / Los Angeles Times