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Intel's mantra: Let's make a deal

The chipmaker's pact with Skype highlights how exclusive content and software can outweigh technology or performance.

Would you avoid buying a PC with an Advanced Micro Devices chip inside because it wouldn't let you host an Internet conference call with six of your friends?

Chip giant Intel is betting that at least some people would. Last week, Intel cut a deal with voice over Internet Protocol provider Skype that calls for the VoIP company to provide advanced conference-calling features exclusively on PCs that run Intel chips. As long as the deal is in place, it could effectively keep customers who want to take advantage of multiperson conference calls from going with AMD-based machines.

Though few would argue that a niche feature like that is going to be a deal breaker for most PC buyers, the importance of the Skype-Intel alliance goes well beyond VoIP conferencing. Indeed, it's the latest, and certainly most prominent, example of Intel's new take on marketing: Lock in software partners as well as the PC makers.

Intel executives have talked at length over the past few years about moving past a marketing strategy that emphasizes chip speeds and power above all else. Paul Otellini, now Intel's chief executive, got the new effort rolling in 1999 when, as executive vice president and general manager of the Intel Architecture Group, he created operating groups that focused on developing software and finding new uses for Intel's products, said Bill Kircos, an Intel spokesman.

Expect more of these exclusive pacts as Intel takes a brass-knuckles approach to its long-running feud with AMD, particularly as Intel's Viiv platform strategy of bundling home-entertainment software with its chips shifts into high gear over the next few months.

Intel executives believe they can use their considerable software resources to improve the performance of processing-intensive applications such as VoIP and home entertainment by working with software application developers to help them understand how Intel's chips process data.

In the process, moves like the Skype deal, which will run for a limited but undisclosed period of time, are a way to block AMD from landing customers who want to use applications such as Skype's 10-user conferencing.

Not surprisingly, AMD is already crying foul. AMD officials claim this is just another example of Intel using its sheer size to decide where AMD is allowed to compete, reinforcing the notion that Intel doesn't play fair. AMD charged in a 2005 antitrust compliant that Intel uses its marketing programs in a selective manner to punish companies who have used AMD's chips, or to reward companies like Dell who have cut exclusive deals with Intel--claims Intel has strongly denied.

Performance in the eye of the beholder
In the past, Intel has set its products apart and improved the performance of applications such as games by adding new hardware instructions to its chips, said Kevin Krewell, editor in chief of The Microprocessor Report.

But there are no specific instructions in Intel's current Pentium D or Core Duo chips that enhance the performance of VoIP applications, an Intel representative said. Skype is using an operation called "Get CPU ID" to identify the type of processor running on the PC. The Skype software has been preset to only accept Intel's chips as having the performance necessary to host conference calls of more than five people, the representative said.

Almost all applications running on any PC perform the Get CPU ID operation as the system boots, said Dean McCarron, principal analyst with Mercury Research. That operation determines what type of processor is in the system and what performance features are available to the application, he said.

Critics contend that if there are no instructions dedicated to VoIP applications in Intel's chips, it's unlikely that Intel's dual-core chips are demonstrably more powerful than AMD's when it comes to hosting VoIP conference calls. In fact, third-party reviewers gave AMD dual-core chips an edge over Intel's last year, though Intel has closed the gap with the recent introduction of the Core Duo processor.

Henry Gomez, general manager of Skype North America, declined to comment on whether the company compared the performance of the two chips head-to-head on its software. A Skype representative later declined to comment on the company's relationship with AMD in general.

By the end of 2006, Intel is scheduled to release two PC chips, Merom and Conroe, that the company believes will tilt the performance balance back in its favor, Kircos said. For its part, AMD won't sit still in 2006; it's also planning to improve the performance of its chips. If there's no clear-cut winner on a performance basis, the product marketing strategy shifts to specific applications and content.

Viiv sets the stage
Viiv is a collection of dual-core processors, multimedia chipsets and software designed to enhance the performance of games, streaming movies and other home entertainment applications. Viiv PCs are rolling out from PC makers this year accompanied by links to special content, such as high-definition highlights of NBC's Olympics coverage, a lure announced by Intel earlier this year at the Consumer Electronics Show in Las Vegas.

That content is currently available to just about any PC, but Intel is extending the verification concept it advanced with the Centrino platform to Viiv. Intel verified that more than 90,000 hot spots worldwide would work reliably with Centrino laptops. It plans to do the same with Viiv, guaranteeing that certain content and home entertainment applications will run smoothly on Viiv PCs.

Given the Skype example, analysts say it wouldn't be a stretch for Intel to take the further step of using its marketing clout to secure exclusive content and software that will work only on Viiv PCs.

A similar strategy has worked very well for new Intel partner DirecTV, which has the exclusive rights to let football fans watch every National Football League game, under its NFL Sunday Ticket service. Any football fan with a television set can watch NFL games featuring their local teams, but those viewers can't watch games that feature cities outside of their designated geographic region unless they have a DirecTV satellite dish and pay extra for the Sunday Ticket. Intel and DirecTV plan to release a Viiv PC later this year that can accept content from DirecTV's satellites.

Savvy marketing or unfair competition?
AMD executives argue that any exclusivity clauses in Intel's partnerships are nothing more than an extension of its so-called market development funds, which provide PC makers with marketing money in exchange for displaying an Intel logo on their boxes, said Hal Speed, a marketing architect with AMD.

Intel's Kircos declined to comment on whether Skype was provided with marketing funds in exchange for making the multiperson conference calling feature exclusive to Intel under a similar program. But Intel's engineers did do the work needed to tweak Skype's software to accept Intel's chips as the default processor for those types of conference calls, he said.

Intel and Skype's deal is for a limited time only, Gomez said, after which AMD is expected to get a crack at opening up its chips to the advanced conference calling feature. But by moving first, Intel has seized the opportunity to paint itself as the preferred platform for Skype, much the same way gaming console makers fight to secure the initial release of sought-after games or cell phone providers pursue hot new phones.

"Grand Theft Auto: Vice City" was released in the U.S. on Sony's PlayStation 2 console in 2002 before making its way to the PC and Microsoft's Xbox in 2003. That limited exclusivity for one of the hottest video games ever released was a boon for PlayStation 2 sales, and Sony currently enjoys a dominant position in the console market, even though the Xbox and a standard PC are considered more powerful devices.

The same could soon be true for the PC market, which has always been about performance even as Intel has retreated from its strategy of emphasizing clock speed as the ultimate indicator of processing power. "If the technology is close enough that it becomes a wash in the consumer's mind, it could be the content that makes the buying decision clearer," Krewell said.