Intel or a competitor inside?

When you dominate a business as thoroughly as Intel does, whom do you worry will become your next competitor? Answer: Your best customers and your potential customers.

Although Intel faces an array of direct competitors, including AMD and IBM Microelectronics in processors, Texas Instruments and Qualcomm in wireless, and Broadcom in the communications chip business, the company’s biggest competitive challenges are giant companies, such as Nokia, Cisco, Samsung, and Sony, that have the option of either buying Intel products or making their own chips. Intel clearly wants to keep these companies as customers instead of competitors.

“Our business strategy over time is we want to be the building block supplier for an increasingly broad set of industries [and] deliver underlying technologies that then other companies use,” Intel’s CTO Pat Gelsinger says. Gelsinger cites Cisco as an example of a current customer to which he’d like to sell more network processing building blocks.

“Inside Cisco there are guys doing ASICs, competing for the system design win for those capabilities,” Gelsinger says. The same thing occurs at Nokia, which currently makes and sells its own semiconductors. “We want them to take advantage of our building blocks over time to deliver value,” he says. He puts Sony in the same category: “We want to get into the PlayStation.” In cases such as Motorola and Samsung, he explains, the internal competitors are located in a different division (the semiconductor division, for example) than potential Intel customers (such as the handset division).

Intel must also maintain strong relationships with some of its biggest partners, such as Dell and Hewlett-Packard, and with Microsoft — the other half of the Wintel alliance — with whom Intel also competes in such fringe areas as compilers. “They’re very tentative about upsetting Microsoft,” Gartner’s Martin Reynolds explains.

Of course, there are also direct competitors, such as AMD, Texas Instruments, IBM, Taiwan Semiconductor Manufacturing Co., and STMicroelectronics. “It’s pretty much everybody who has a fab,” Gelsinger says. The worldwide semiconductor industry goes through dramatic capacity fluctuations, and over the past year there has been huge overcapacity in the worldwide semiconductor industry, Aberdeen Group’s Peter Kastner says. But in the past couple of months, he says, fab utilization has been trending upward.

Since Intel is one of the few companies that both designs and completely manufactures all its chips (the others are IBM and TI), it does have the advantage of scale, Reynolds says. “No one can contend with the economics of mass production from Intel’s CMOS factories and Moore’s Law,” he adds. However because Intel’s processors require a top-flight manufacturing organization, he notes, “[Intel’s] cost structure tends to be a little higher, and it’s difficult for Intel to work in a business that’s low-margin.”