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Networking chip buy signals new Intel thrust

The chip giant's core market may be PCs, but the company's latest move signals a new and different thrust into the networking industry.

Are you ready for Intel?

The chip giant's core market may be PCs, but the company's latest move signals a new and different thrust into the networking industry.

Over the last year, the Santa Clara, California-based firm has made a variety of bandwidth-oriented investments, though none approaching today's $2.2 billion acquisition of Level One Communications, the largest purchase in the company's history. And unlike previous attempts to gain a foothold in the market for equipment used to connect computers in small and medium businesses, Intel now seems to want to be a bandwidth facilitator, providing chips that speed data to a PC over a high-speed connection.

The massive investment in a leading maker of communications components for telecom and corporate networking equipment is a clear sign that Intel wants to bridge the worlds of PCs and high-speed networking. Included in Level One's portfolio is an array of technology for digital subscriber lines, or DSL, a high-speed alternative that is expected to take off over the next few years along with cable-based alternatives.

The acquisition also hints at Intel's worries about competitive pressures and a potential slowdown in the PC chip market.

"This is a tacit admission that they have concerns about the growth in the microprocessor business. And it's a signal of a new strategic direction for the company," said Fred Zieber, analyst with Pathfinder Research.

Intel continues to move on a variety of fronts in networking, not necessarily with the aim of challenging the likes of Cisco Systems in high-end businesses, but likely with the intention of applying the same practices it's used with so much success to drive sales of PCs. Executives have long articulated a desire to facilitate a network of 1 billion connected computers in the next decade, with the aim of providing the components to make that happen.

"Every one of those computers connects to something else on the other end of the wire," said Mark Christensen, vice president and general manager of Intel's network communications group, explaining the rationale for the agreement.

"There's a tremendous opportunity in the wide variety of high-bandwidth technologies," he said.

Analysts said the move is atypical of the firm, but high-pressure market dynamics in PC chips could be the motivation for Intel, given the higher prices associated with networking components.

"Intel typically makes investments in companies that are key in improving the PC market. This is very different from that," said Nathan Brookwood, a principal at Insight 64, a microprocessor consulting firm. "This is not like a software product that might drive demand for high-end Intel processors, such as investing in Linux-type companies."

Intel needs to enter new markets to continue the company's growth due to increased competition from Advanced Micro Devices and National Semiconductor has eroded Intel's sales in the PC microprocessor market, Brookwood said.

Suppliers to communications companies geared to building the Internet infrastructure sell their chips for $60 to $70, Brookwood said. "That's good for any semiconductor vendor. Rather than start from scratch, they decided to go with an established presence in that market and it's potentially a large market."

Intel will square off in the marketplace with Lucent Technologies' semiconductor division and Broadcom, among others.

Pointing out that Intel is already in the networking business, Bill Ruehle, Broadcom's chief financial officer, said the Level One purchase creates a chance for Broadcom to steal market share from its rival. Because Intel goes against Bay Networks, 3Com, and Cisco in the low-end hub, switch, and Ethernet markets, Ruehle believes those networking companies will now prefer to purchase their chips from a company that doesn't compete with them.

"If you had a choice of buying a product from one or two vendors and one competes with you on product lines and one didn't and their products were equal, what would you do?" Ruehle asked rhetorically.

Broadcom, which generates 40 percent of its revenue in the chip business for networking companies and 60 percent in digital set-top boxes and cable modems, hopes to exploit the distractions that could come from Level One's proposed purchase, Ruehl said.

Level One currently counts the likes of Cisco, Lucent, and Tellabs as customers, among a slew of others.

Still, Intel chief Craig Barrett's interest in this sector is easy to understand. In the next three years, sales of communications chips are expected to rise twice as fast as sales of microprocessors, which provide most of Intel's revenue, according to market researcher Dataquest. Intel's networking sector products now contribute less than 10 percent of the company's $26 billion in annual revenue.

"The industry is maturing, now that it's getting the attention of the semiconductor people," noted Amos Wilnai, founder and interim CEO of MMC Networks, a maker of advanced switching chipsets.

The chip giant's move comes as it preps for an anti-trust trial that begins next week. Since the company has little presence in the networking market, the acquisition may not raise too many eyebrows with regulators.