Analyst sees threats to Intel

Speaking at one of the computer industry's largest and most prestigious gatherings of engineers, the Windows Hardware Engineering Conference, Michael Slater said that Intel will increasingly have to compete against IBM's chipmaking arm, which has become a major manufacturer of low-cost, Intel-compatible chips for Advanced Micro Devices, Integrated Device Technology (IDT), Cyrix, and possibly others. Slater is the founder of MicroDesign Resources and founder and editorial director of the Microprocessor Report.

"IBM has turned into Intel's worst nightmare in a certain way. They have [manufacturing] deals with every one of Intel's competitors," he said.

Slater's comments come one day after the chipmaking giant revealed president and chief operating officer Craig Barrett will replace Andy Grove as chief executive, taking over at a time when the company must learn to cope with lower margins and the irreversible trend toward low-cost computers--or else risk losing its seemingly unassailable position as a computer industry superpower.

Slater's remarks strengthen his original position on this month's news that IBM will begin to make low-cost, low-power processors based around designs from Advanced Risc Machines (ARM) and act as a contract manufacturer for IDT.

Several reasons exist for IBM's threat in this arena, he said. Its production technology is good, it has an unrestricted Intel license, and the PowerPC chip is fading as a major chip technology.

New Intel clone chip companies may also tap IBM for chipmaking in the future, he added.

Ominously, IBM itself may even come up with its own chip based on Intel's x86 architecture. "In time, IBM is going to have to find a way to control its own destiny...Ultimately, IBM is going to have to get x86 capability by either buying it or building it."

Intel?s chip architecture is referred to as x86.

The ongoing Federal Trade Commission (FTC) investigation poses another threat, Slater opined. "There is no question that there is a perception [among computer manufacturers] that if they are not loyal to Intel they will not be treated as well," he said.

This could include getting fewer chips on time or not getting non-disclosure agreement (NDA) briefings as speedily as rivals, he said. Briefings done under an NDA typically involve closely guarded future Intel chip and component plans, critical to PC manufacturers as they design their next-generation products.

Stories abound that vendors often try to make non-Intel based machines, according to Slater. "Then, in an Intel meeting an Intel executive might say, 'This could jeopardize our relationship.' [As a result], the computer never sees the light of day."

Slater was quick to point out that he could not cite specific incidents but merely said that such allegations persist from certain quarters.

Intel has steadfastly maintained that it is taking extreme measures to ensure that it is not violation of federal laws. Intel "has an aggressive program in place to make sure its business practices are in full compliance with federal laws in this area...Management, including internal counsel, does not believe that the [FTC investigation] will have a material adverse effect on the company's financial position or overall trend in results of operations," Intel said in this year's annual filing to the Securities and Exchange Commission.

Intel could also have problems with the FTC concerning its stance on chipsets, the companion chips to the main processor, Slater said. Intel is not licensing the "P6 bus" to independent chipset vendors. The P6 bus is one of the core intellectual properties for the Pentium II chip.

As a result, Intel will have 100 percent of the market for chipsets that would work with a Pentium II, Slater said. This "could be a red flag for the FTC," he pointed out.

But Intel says it's not that cut-and-dried. "P6 bus licensing exposes too much core intellectual property," said an Intel spokesperson. However he added : "We are consistently in discussions for licensing intellectual property for fair value."

Slater also spoke to other challenges. For Intel to continue to grow at its torrid pace, it will have to go to new markets or get more dollars out of each PC by selling graphics chips or PC circuit boards, he said.

"Intel's biggest challenge is to continue increasing their revenues and profits," he said. Intel could drop from $5 billion in profits to $4 billion, he said by way of example. At this level, Intel would still be quite successful for a semiconductor company. Wall Street, however, would shudder.

The chipmaker will likely lose market share in the coming year in the low end of the processor market, Slater predicted. Overall, competitors may grow from 15 to as much as 20 percent of the market, with most of the increase coming in the low end.

Still, the company has huge advantages, according to Slater. It controls pricing in the microprocessor market, it has better process technology and manufacturing than its competitors, and it has strong relationships with PC manufacturers, many of which do not want to disturb their Intel relationship.

Intel is an investor in CNET: The Computer Network.

Brooke Crothers reported this story from San Francisco and Michael Kanellos from Orlando.