Smaller Intel reaches for new chip markets

Intel’s new generation of processors with 45-nanometer features will help it earn profits from rising demand for notebook PCs and enter a nascent market segment called mobile Internet devices, the company’s CEO said Thursday.

That new market niche may have low profit margins today, but Intel is able to enter it anyway because of the success of its recent corporate restructuring, Paul Otellini said in his annual address to analysts in New York.

“One year ago, I talked about how Intel needed to add to its gene pool a focus on efficiency and cost that we didn’t have at the time,” he said. Since then he has trimmed his company’s workforce from 103,000 in the first quarter of 2006 to 92,000 by the end of the second quarter of 2007.

“I believe the metrics on this are quite good,” including forecasted budget savings of $2 billion in 2007 and $3 billion in 2008, he said. The change has allowed Intel to reduce its overhead costs and become more “nimble” and able to enter new markets, he said.

Otellini is not done cutting yet. “I expect our headcount will continue to drop over the course of this year,” he said. The company said on Thursday that it planned to lay off as many as 1,000 people from an outdated flash memory chip plant in New Mexico.

Already, the changes have allowed Intel to regain some of the market share it had lost in recent quarters to rival AMD. Intel has seen its share of the global number of chips sold drop from over 80 percent in the second quarter of 2005 to just over 70 percent in the second quarter of 2006, but that number has now returned to a range of 75 percent to 80 percent, Otellini said.

While AMD also plans to release a raft of new chips, Otellini argued that he could keep his sales advantage. “Not all 45nm products are the same. We think our design gives us an advantage, and we will have at least an 18 — possibly a 24 — month lead in the market compared to anyone else who’s out there.”

Intel is shrinking the dimensions of its chip components from 65nm to 45nm in its Penryn processor family scheduled to launch in the second half of 2007. The new design will allow the company to extend its reach from the traditional notebook, desktop, and server markets into faster growing segments including low-cost PCs for developing countries, media-rich consumer electronics like the Apple TV, and MIDs (mobile Internet devices) like ultra-mobile PCs.

Intel will reach for the MID market with a chip called Silverthorne, a version of its 45nm architecture family with small enough size and power demands to drive full Internet and voice connectivity on pocket-size devices, he said. Otellini showed off a 300mm wafer including 2,500 prototype Silverthorne chips, and said he planned to sell them as both standalone processors and integrated components in a system-on-chip platform.

Intel will also use its 45nm design to reach for new ground in the high-performance computing segment with a chip called Larrabee, using more than eight cores to execute applications like very high-end graphics. Intel sees a large market opportunity in the creation of “mega datacenters,” measured by skyrocketing capital expenditures by Internet-based companies like Amazon, eBay, Yahoo, Microsoft’s MS Live, and Google.

In the retail market, Intel is ready to pounce on rising demand for notebook PCs, which will begin to outsell desktops by 2009, the company says.

“We make more money on notebooks than desktops. Notebooks also have a higher refresh rate, in part because they are often lost or dropped,” Otellini said. Intel earns an extra $100 million in annual revenue for every percentage point it changes in the ratio of desktop to notebook chip sales.

The company is predicting brisk sales of its new Centrino Duo and Centrino Pro “Santa Rosa” notebook platforms, which PC vendors have already picked for more than 200 notebook models leading up to Intel’s product launch next week.