Sunday, July 23, 2006

Intel's dilemma

Last week, Intel announced low revenue and earnings and projected the same for at least next quarter. Revenue was $8 billion and earnings were $885 million for the second quarter, down 13% and 56%, respectively, from a year ago.

Of course, Intel's problems have been no secret - AMD has been taking back marketshare for a while now. So what is Intel to do? They are caught in a price war in a market that has finally been hit by commoditization.

Intel's storied past makes my answer all the harder to swallow. Founded by 3 of Fairchild's Treacherous 8 (Robert Noyce, Gordon Moore, and Andy Grove), the company has been the darling of the computer industry, almost as dominant as Microsoft and infinitely more likable, boasting superior technology and marketing.

In fact, the decay of the one of the most brilliant marketing campaigns in history, "Intel Inside," is one of the biggest reasons for Intel's current position. For 14 years, consumers truly believed that their computer was significantly better off with Intel chips inside and were willing to pay a premium for them. For some part of those 14 years, this may have been true, but chips have long since become a commodity, and performance across brands has become basically equal.

And, at last, the consumer has realized this. However, before I give my thoughts on what the firm should do, I will digress again. I am hearkened back, once again, to a case study in my Management 237 class last semester. Very much like Intel, Kodak had fought off commoditization in the film industry for years, but the market was finally beginning to catch up with them. We were asked what Kodak should do in this situation. A friend and I boldly convinced our group of 6 other people (or rather spoke for them before they could say anything) that Kodak should sell the company.

Yeah, you read that right. Why? Sure it's a little crazy, but it makes sense. Kodak, at the time, still had a huge brand name, but it was becoming increasingly obvious that Asian film makers would be able to match (or beat) Kodak's price and quality. So, instead of sticking around and struggling for survival in a commodity market, why not just cash out at the high price their name would allow? The company, of course, didn't do this and went on to become a market leader in other fields, but their film division kept losing market share and profits.

So do I think Intel should sell itself? No, but they should learn a lesson from the past. Currently, they're saying all the things investors want to hear (they're going to try to gain back market share, etc.), meaning they will pour vast amounts of money into marketing and production. But why? Instead of trying to fight the inevitable, they should scale back operations, cut production, and try to limit losses. By realizing the hard times ahead and saving cash now, they put themselves in a position to live to fight another day. The price war and commoditization of the chip industry means that Intel will never enjoy dominance and high profits until a discontinuous innovation comes along and turns the marketplace on its head. Intel needs to devote resources to discovering that next discontinuous innovation (i.e. R&D) and exploring other business opportunities and industries (outside chips) that give them a better shot at market dominance.

Though it's unpopular and unconventional, this is the way to go. But will they do any of it? Probably not.

4 comments:

  1. Do you think your post is still relevant given AMD's recent stock price slide (40% I believe)? AMD has suffered recently w/ the release of Intel's Core Duo, which is supposedly 30-40% faster than AMD's equivalent chip. As you probably heard, AMD also announced a merger with ATI today to develop a "chip platform" to compete with the chip platform that Intel is developing. Many analysts believe and AMD admits that without the merger, AMD may have trouble competing with Intel as Intel develops chips that integrate the processor and display activities. Given the core duo, the integrated chip platform that Intel is developing, and Intel's still substantial market share, what makes you think that Intel is being made technologically irrelevant like Kodak?

    -The G. Su

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  2. I think the ATI merger is interesting, and if anything it further weakens Intel's position. Good point there.

    But my overall point doesn't change. AMD's stock did go down, but that's to be expected. The chip industry is in the midst of a price war, which are painful for everyone involved, even the small guys who are gaining market share.

    The integrated chip platform is a great example of a discontinuous innovation (I know you love that, Gordo) in the chip industry. I meant that Intel should scale back operations in parts of the industry that are becoming commoditized. The integrated chip platform definitely isn't one of those parts.

    I think the overall point is Intel should realize which losing battles it is fighting and take a defensive position rather than futilely throwing resources at gaining back market share.

    Nice comment, by the way. And to all those out there reading this who are not Gordon Su, Gordon was the friend I was referring to in the post, fyi.

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