Intel: Play to win

With prescient management decisions, excellent execution--and some luck--Intel has driven almost all of its competitors out of the processor business and established a firm stranglehold on original equipment manufacturers (OEMs) in the PC market. While AMD finally seems to have a competitive processor with Athlon, there's no doubt that Intel remains the dominant firm that calls the shots and sets standards for the PC.

However, the "free PC" phenomenon and declining average selling prices have put pressure on Intel, forcing the company to look beyond its core business for ways to grow revenues.

Communications and networking are the expansion areas upon which Intel has set its sights. These are natural extensions for the company. After all, if Intel can help lift constraints on network bandwidth, and allow richer forms of media to reach the PC platform, then this will drive demand for higher performance PC-processors.

An accelerating trail of acquisitions over the last year demonstrates that Intel is very serious about assembling a dominant communications portfolio. The chip giant has adopted an aggressive acquisition strategy, reminiscent of Cisco Systems' approach for making moves into new markets: purchase firms with the expertise you need.

The acquisition binge started in October 1998 with Intel's purchase of Shiva for $185 million. With Shiva, Intel gained an installed base of customers and technologies in remote access networking, including access servers, access concentrators, and emerging virtual private networking (VPN) products for small and medium-sized businesses.

In March of this year, Intel acquired Level One for $2.2 billion. Level One, a leading supplier of silicon for high-bandwidth communications, gave Intel a strong portfolio in both local area networks (LAN) and wide area networks (WAN).

Prior to the Intel deal, Level One bought Jato Technologies and Acclaim Communications to broaden its penetration into the networking market. With Level One, Intel gained both new enterprise LAN customers and an entry into the network access business on the telecom side.

In June, Intel acquired Dialogic, a vendor of computer-based telephony solutions, for $780 million. With Dialogic's hardware boards, components, and software, Intel acquired a complete voice-over-IP package that integrates the IT and telecom infrastructures.

In July, Intel acquired Softcom Microsystems for $150 million. Softcom designs network processors for Internet protocol (IP), asynchronous transfer mode (ATM), and other proprietary protocol environments.

At the recent Intel Developer Forum (IDF) in Palm Springs, California, Intel revealed further signs that it is continuing to develop communications expertise, announcing the acquisition of NetBoost, a software firm that specializes in telecommunications networks. With NetBoost, Intel gains yet another foothold in the network server and LAN/WAN environments.

Also at the Developer Forum, Intel announced 13 new networking products, including a LAN switch that ferries packet-based data transmissions quickly across IP networks, and a programmable network processor. Called the IXP 1200, this network processor uses a core technology called StrongARM, which Intel acquired in its deal with Digital Equipment's semiconductor division.

With manufacturers such as Cisco, Cabletron Systems, and Newbridge Networks announcing support for Intel's new products, the chipmaker is already finding success in the networking environment. In doing so, Intel moves into direct competition with communications technology suppliers such as Motorola and Lucent, as well as some smaller companies like Galileo, MMC Networks, Broadcom, and PMC-Sierra.

Intel is attempting to provide complete solutions in communications. Its decision to offer its own LAN switch shows that the firm is not limiting itself to the processor segment of the communications market. Intel no doubt will leverage its expertise in processors to become a leader in communications technology integration. We've seen this in the PC, where the processor has encompassed more and more of the PC system's value and functionality.

Smaller communications players should make no mistake that Intel's goal is to dominate would-be competitors in the communications infrastructure market in much the same way it has dominated the field for PC semiconductors.

Although relatively new to the communications market, Intel already has built capabilities in access, voice-over-IP, and network processors. Intel is used to setting the standards in the PC market and is attempting to set standards for communications with its Internet Exchange (IX) Architecture, which aims to standardize silicon components in communications equipment. Intel has also established a $200 million fund to invest in companies that develop products based on the IX architecture.

Over the long-term, Intel is clearly taking the right steps to diversify its business away from the PC and into the Internet, networking, and communications markets.

As Intel positions itself to be the major silicon provider in the communications market, more acquisitions and product announcements are likely. Intel has been very deliberately building an empire in communications--and when Intel embarks on something like this, it is very serious about winning.

BancBoston Robertson Stephens maintains a market in the shares of Broadcom, Cisco Systems, Galileo Technology, Intel, MMC Networks, PMC-Sierra, and has been a managing or co-managing underwriter for or has privately placed securities of Galileo Technology within the past three years.

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