The Intel insider

Paul Otellini once seriously considered becoming a lawyer. Then he reconsidered--a smart decision: After twenty-seven years in the trenches, he?s now one of the highest-ranking executives at Intel.

Throughout that long career, the 51-year-old Otellini has played a part in many of the important events shaping the company. His various roles have ranged from managing relations with IBM in the early 1980s to running sales and marketing for the entire company. He oversaw Intel?s push into Ethernet silicon and PC chipsets and also served as technical assistant to former CEO Andy Grove.

Since 1998, Otellini has been in charge of the Intel Architecture Group, which means he is responsible for PC, workstation and server processors as well as research and development. And ever since the transfer in power last year that officially elevated Craig Barrett to CEO, Otellini has been frequently mentioned as one of the top candidates to be next in line for the No. 1 job at Intel.

But that's--possibly--the future and Otellini has more than enough on this plate in the here and now. The challenges are increasing, what with the drop-off in the economy in the last year and a half as well as

Intel's new mobile processors smaller, faster Paul Otellini, VP, Intel Architecture Group

stepped-up competition from rival Advanced Micro Devices. What's more, Otellini has to keep his eye on the payoff from a restructuring of Intel's microprocessor business in the last year as he looks to refashion a more nimble and responsive organization.

Otellini, who spends about 40 percent of his time on the road, recently sat down with CNET News.com to talk about the business and what's on tap in the near future as Intel seeks to spur more people to buy systems based on its P4 chip.

Q: You're out there in the trenches, so to speak. How does it look in the PC market right now? How does it look for the second half?
Our view is that the industry should return to normal growth patterns in the second half. For long-term growth in 2002 to 2007 or 2008, our view is that it returns to the trend line. Historically the first half is bigger than the second half.

Would you care to comment on the rivalry with AMD?
No.

What is it about processors that get people so riled up?
The rabidness tends to be a very small segment of the population. The computer industry is 150 million units per year--and the number of tech zealots is under 10 percent. You and I may happen to live in that world, but it's like living in Washington, D.C. You think everyone is into politics.

Can you compare 2001 to 1998, when you first stepped into your current job and the semiconductor market also took a downturn?
I think it's almost an incomparable year. Depending on how the year sorts out, it's very close to being the first no growth year in the history of the PC. Based upon that, there's really been nothing in the 20 years it's been out that compares to this. I think about that a lot. Is this the beginning of a trend or a reflection of the market we saw in 1999 and 2000? I think it was the latter. Demand was above the trend line. It accelerated in 1999 and 2000. Some of that had to do with the Y2K prepurchases and there was the Internet boom. If you take 1999, 2000 and 2001 together and divide by three you get a much more accurate picture.

What made you decide to cut prices on Pentium 4 in April? Was it a specific incident? Or was there a consensus inside Intel that price cuts were needed to get the chip moving?
We cut the prices on every product every quarter. The April move was very consistent with that. The more interesting view of that is what we talked about in the (second-quarter earnings) analyst call where we talked about being even more aggressive with Pentium 4 throughout the rest of this year to essentially drive it into the mainstream.

So were those price cuts way overblown?
I do believe that the moves we made were a significant acceleration versus our prior trends. We are going to push the Pentium 4 to transition from the Pentium IIII, and we're driving the P4 down to mainstream price points from $800 on up. That was driven by three things: the health of the product, overall capacity and the introduction of the 845 chipset ahead of schedule.

Does the state of the PC market worry you at all? Analysts say that the majority of PCs are being purchased at prices that range from $800 to $1200 and that there is little activity at prices above $1500. Does this mean that Intel will have to permanently change its processor pricing structure to offer lower priced chips that fit into this band? Or is this a function of the current market?
That's what Celeron was all about. When we introduced it, it was to satisfy prices under $1000 and now it?s under $800. I think there's a long-term kind of secular trend here, in terms of the electronics to become increasingly integrated and (manufacturers) to pass on the cost savings. Graphics, I think, is a very good example. Most of our chipsets include integrated graphics now. For the low-end PCs, the very function of integration takes $10 to $20 out of the bill of materials. That's happening in every element of the computer. There's no need to rethink pricing. Our entire business model is set up to displace our old products with our new products.

We all heard what you said during Intel's Q2 financial analyst conference call: "We will do what we need to do to transition from the Pentium III to the Pentium 4." What did you mean by that?
Our entire business model is predicated on displacing our older product line with newer products. We have been doing this as a company for over 30 years and in the PC arena for 20 years. We will use our design, marketing and manufacturing assets to make the transition from Pentium III to Pentium 4 happen as quickly as possible.

With price cuts in effect and the 845 chipset shipping relatively soon, do you feel Pentium 4 is about to come into its own?
It's already in major volumes. We said the volumes doubled again this quarter. We'll just continue to grow over the year. The industry now is very much a price point displacement model. If you hit the right price point?people will always take better technology. The new platform (Pentium 4) and a new OS (Windows XP) is incentive for people to upgrade. There's something like 50 million Pentium IIs out there under 500MHz and another 50 million Pentium IIIs at 500MHz. You've got a potential for upgrades that hasn't existed for a number of years.

Pentium 4 will hit 2GHz very soon. What do you expect people to do with processors of that speed? What do you think when you hear people say that you don't need that kind or processing power?
I have literally had that same question asked of me for the last 25 years. I think that's bunk. Would you be happy with your 286 or your 386 or your Pentium 100? No. The beauty of the industry is that the software grows to consume the MIPS that are available. They demand more MIPS to get similar performance as the previous generation. Ask anyone who's doing advanced work--photography or ripping CDs or home videos--and they'll tell you, 'Give me more MIPS.' I have a 20-year-old son. This is how he spends his time. He's always bugging me for a faster computer.

What will the PC look like in five years, aside from faster processors?
It will be smaller, faster and wirelessly connected. Always connected--there will be a seamless connection for the devices you use with it (such as PDAs.)

What about servers? You must have breathed a sigh of relief when Itanium finally "shipped" How important is Itanium to Intel?
Incredibly important. It is our desire to move it into the very highest ends of enterprise computing. You've seen essentially every major computer company in the world, except one, firmly committed to it. As you get that kind of commonality, the software environment tends to follow very rapidly. In this space, it's not just about the microprocessor; it's about the capability of the platform. That is jelling now. I think it gets more interesting next year, when you see second-generation (McKinley) systems, especially coupled with technologies such as Infiniband. It becomes very interesting in terms of the ability to run every aspect of computing in this architecture.

How did you arrive at the recent deal with Compaq, which plans to phase out its Alpha chip in favor of Itanium?
Suffice it to say that doing proprietary microprocessors is a bloody expensive business. Doing any microprocessor is a bloody expensive business. If you're amortizing that cost over a few units, it's even more prohibitive. Differentiation is not in the processor. Compaq came to the same conclusion that HP did--which is that I can use my engineers to do other stuff because Intel can do (the chips) better and cheaper.

Where is Intel going with its mobile processors? My sense is that Intel will begin segmenting that market even more, starting in 2003 with the successor to the Pentium III-M. Will we see a new Pentium brand at that point?
It's too soon to predict that. There will be no brand before there is time. I do think the trend is correct in that we're now developing specific products for mobile. Ultimately, the ability to build in seamless connectivity and to have very low power consumption are the vectors that we have the team on today.

Realizing that decisions on adopting technology must be made years ahead, we'll just cut to the chase on this one. Was Rambus a mistake?
Hindsight is wonderful. The technology is not problematic. The technology is still the best technology out there for showing off the microprocessor. The problem is the cost structure. The cost structure never met the goals we had. I look back and say for the time, I really think it was the right technology.

What's the future for the Architecture Group?
Some analysts have suggested it would become a cash cow of sorts for Intel, meaning that it will provide steady revenues for the company but grow at a much slower pace than other businesses. Our goal is to grow as quickly as the computing markets we serve will allow and to grow our revenue per computer over time. I absolutely do not view Intel Architecture Group as a cash cow. We are investing to grow our business and capture new revenues.

Following up, has Intel's overall Internet building blocks approach been sidetracked by the lousy semiconductor market of late? Any changes to that strategy in the works?
There have been no changes to our fundamental strategies.

What's next, Paul? Are you Craig Barrett's successor?
You'll have to ask Craig and the board. I don't think I'll get a vote. Craig has said very skillfully and elegantly that there are a number of senior managers at Intel that have the potential to move up.