Transmeta's new tag team

And for good reason.

Company founder Dave Ditzel, who guided the start-up from its inception in 1995, is sticking around as vice chairman. But he's also stepping into a role more suited to his background--chief technology officer--while turning over the CEO reigns to Mark Allen.

Allen, who until the promotion was president and chief operating officer, had been effectively in charge of day-to-day responsibility for running the chip company.

The transfer of authority takes place as Transmeta faces the challenge of slowing industrywide demand for new processors and stepped-up competition from rival Intel to supply chips that consume less power to computer makers.

CNET News.com's Michael Kanellos recently sat down with Ditzel and Allen for an update on the company's progress.

First off, why the change?
Ditzel: Well, part of it is that Transmeta is a growing company. And as companies grow, things change a little bit. In the early days, we were really an R&D company. And my background is as a microprocessor designer and trying to build this brand-new way of building software-based microprocessors.

As we look at Transmeta today, we're well over 400 people, and the characteristics of the company have changed a little bit. I spend probably three out of four weeks a month, actually, on the road. And over the last year, with the IPO and other things, it's been very much like that for me in my calendar. So what's really been going on is that Mark really has been running the company over the last year since he's come in. And I just think it's a very natural change actually to shift over the title to reflect the job he actually has been doing here.

So as far as we're concerned, not much is actually going to change at Transmeta. I'm just going to continue to evangelize (the) Crusoe (chip) and work on product strategy and Mark is going to continue to run the company on a day-to-day basis and make it all happen.

Allen: I agree, of course, with what Dave said. While maybe there's a change in title, the rest of it is a pretty natural transition.

Were there any calls from Wall Street to expand the management staff like this?
Allen: I was at the Morgan Stanley conference and I think in something like 15 round ones, two breakout sessions and our presentation, we only got about three questions...and they all took it as very matter-of-fact. In fact, I think they were somewhat happy to see that the company was adjusting as it was changing through its cycle here.

Ditzel: The other thing that I'm particular happy about is while we've answered the question, How do we transition to a large manufacturing company? I think Mark's background is perfect for that.

Where is Transmeta going for 2001? Last year at this time you were talking about notebooks and devices. Now servers have become a big element of the strategy.
Ditzel: Well, we like to surprise people a little bit. I guess Transmeta is known as the company of secrets. Although we announced notebooks and appliances in January a year ago, we actually had started to work on the server stuff--and we were working for over a year with some of these (server) companies--and we had kept that as a secret. One of the issues in this very competitive business is always to keep coming out with a few surprises and we intend to keep doing that.

Right now, it seems like the device market is not going that well. Gateway is even talking about reevaluating its own Web Pad, which has a Crusoe processor in it. Is this a market that's being affected by a slowdown in demand, or is it that companies still need to really work their designs?
Ditzel: I think the appliance market is a new and growing market, so I think the notion of going from zero to 4 million in one day perhaps set expectations too high. Transmeta had always said that most of our revenue initially was going to come from notebooks. And so we think we're very consistent with that.

How does revenue divide today?
Allen: I would say for 2001, we're currently telling the analysts it's probably over 95 percent notebook space.

Where are most of the notebook wins coming from? Is it still in the Asian market? When do we see a greater penetration in the U.S.?
Allen: The majority of the sales is still within the Japanese market, and the Japanese market, unlike the U.S. market right now, is still very strong. Sony's introduced their Picture Book both in the United States and in Europe and we're working with several other customers that have already either introduced products or will introduce new products, and we're working with them on marketing programs to have them bring their products back into Europe and the United States also. One of our three key goals within notebooks this year is to get more geographic diversification.

Ditzel: This is something we call our "Japan First Strategy." This has been kind of intentional and I think it's been a great success for Transmeta. Five years from now you look back, people are going to say, "Wow! It was really clever to go after Japan." People think that Japan is a small market compared to the U.S. And in desktop PCs, that's true--maybe it's only 10 percent or so. But if you look at notebooks, Japan buys 60 percent roughly as many notebooks as the U.S.

What are the other two goals for the notebook market? We talked about three goals, three key goals. One was geographic distribution.
Allen: Right now we're focused on the one- and two-spindle markets. (One-spindle notebooks are the thin and light notebooks that contain a CD or DVD drive. Two-spindle notebooks contain two external bays and are larger.) Even based on our competitors' data, this is 60 percent of the market share for this year and next year. Our goal is to get more and more designs not just in one spindle, but in two spindles.

The second goal is to grow in form factor. There's multiple form factors, from a small Picture Book up through a multimedia PC. And we're focusing very hard on growing more market share in the larger notebook form factors, which is more of the business-size machines for a multimedia PC.

How about that value segment, the consumer value segment?
Allen: Well, I think we're certainly helping because we're very competitive on pricing, but I think our real focus is on battery life and weight.

With the slowdown in the economy, will you be affected by cost cutting? Are manufacturers saying, "Well, we love Transmeta's chips, but we can't really afford to make an Intel SKU and a Transmeta SKU. We're just going to stick with one chip company for now"?
Allen: We'll have to see what happens. In Japan, as I said, the economy is going strong. The U.S., as you know, is probably in a recession, depending on your definition of recession. I think most of the U.S. OEMs (original equipment manufacturers) right now are rather chaotic. For example, Dell has their first layoffs of their life. I'm sure they're going through a hell of a culture shock. I think one of our concerns is, does the U.S. recession spread throughout the rest of the world? That's just something we're watching very carefully.

What kind of or how much pressure are you seeing from Intel? Every time Transmeta makes an announcement, three weeks later you'll see Intel come out with a similar initiative.
Ditzel: All we can say is we must be doing something right, because Intel sure is paying a lot of attention to us. We don't mind Intel endorsing an agenda that we set out there. That basically validates us as kind of leaders in the markets of thoughts in this space we're going into. I'd much rather have them do that than say, "Hey, this market doesn't matter. We got better products."

Do you have projections for the unit volumes you'll have this year?
Allen: We don't give guidance on unit projections.

What's the calendar for new versions of Crusoe?
Allen: Currently we're shipping the 5400 and 5600, which is in production with all of our customers today. And then the 5800, that's the 0.13-micron version, we'll be shipping in the second half this year.

Another topic in the notebook world has been benchmarks. There's been this whole issue of how do you really rate the performance of these notebooks. Are you or is anybody going to come out with a decent way to test performance and battery life and to really look at the overall package?
Allen: The most important thing is real-world usage. You buy the machine and use it. How does it feel? How long does your battery's life last? Those are simply the best tests out there because it's too easy to contrive benchmarks to say anything one way or the other. Independent of that, we actually perform extremely well. So we're not at all ashamed of the benchmarks that are out there, but you can always go and find one that makes your competitor look worse or us look better or other things on both sides. And so that's why in fact we just refer people back to the most important benchmark, which is how long does your battery last?

Right, but is that good enough for that sort of mass market? People go to the Web or read magazines and look for those fancy performance numbers. Are you working with any Gartner or any sort of organization to possibly come up with some sort of test?
Allen: It's a very complex issue. And so yeah, we're doing a little bit of work there. But who knows? In the end, if you come out with a better spec or something, nobody knows whether to believe it because they know all the games people play with benchmarks.

When you say you are getting into the larger notebook form factor, are you going to make a stronger push into the corporate market?
Ditzel: Absolutely. Crusoe has some interesting advantages in corporate compared to some of the other alternative processors in the past. If you look at the prior processors, people will just say, "Well, we'll save you $100 on the list price of your notebook." That's not our strategy. I think the issue for corporate buyers is if you get on the airplane for a six-hour trip but you can only work for two hours, you wasted four hours of time of your executive on every flight. NEC on Feb. 14 introduced a new notebook in Japan--incredible business machine with Windows 2000 on it. And we have a number of interesting design wins already in Japan--vertical things through insurance companies, other areas where Crusoe is going in.

How about in the U.S.?
Allen: Well, actually, Sony in the U.S. is seeing quite a bit of interest in the corporate market, even in the little A4 Picture Book, which is not what you physically think of as your corporate machine.

Really?
Ditzel: Well, for example, insurance companies love the little camera in there. You give it to every insurance agent and they go out and take a picture and immediately e-mail it back. There's new wireless communication cards coming with the Sony Picture Book, so you're on the Internet. And again, when you're actually using wireless capability, it's completely changing the mindset from how a lot of the older traditional notebooks have been when a notebook was kind of plugged in most of the time. With wireless capability, you're out and about and you care about your battery life a lot more. And so that's why I think Crusoe is becoming more popular there than the prior approaches.

How crucial is it to get one of the Hewlett-Packards, Compaqs or IBMs to adopt Crusoe for one of their notebooks?
Allen: I think what will happen is that the Japanese will start to migrate their systems back into the U.S. That will end up bringing pressure back on the U.S. OEMs. Additionally, AMD's value added in corporate success has been pretty low, but all they've really offered is about $100 off. If you're offering a better battery life, I guess it needs the businessman that wouldn't go down and tell the MIS guy he wants that system.

And two last things. Is price much of an issue at all? I mean, I know you're under Intel's prices, but are people mostly looking to battery power? Do they look at all at price when it comes to your products?
Allen: I guess the first answer is the number-one requirement is battery power, but this is electronics and the consumer industry for the most part, so price is always an issue.

And one last thing: Is there any projection for profitability?
Allen: The current analyst models show breakeven in (the fourth quarter of 2001) or (the first quarter) of next year. That's not our projection; that's the analyst model. We don't give guidance out that far.