Intel reaches for communications top spot

"Our goal is to cement our position as the No. 1 supplier of communications building blocks -- that's silicon and software -- for the industry," said Sean Maloney, executive vice president and general manager of Intel's communications products group, speaking after a keynote speech at this week's Comdex Spring technology trade show in Chicago.

Of course, it won't be easy. Intel has built up a strong revenue base through a rapid series of acquisitions, but it has yet to emerge as the dominant dynamo in communications silicon, where it ranks behind Texas Instruments, Lucent Technologies and Motorola, according to researchers at Morgan Stanley.

At its spring financial analyst's meeting, Intel is expected to announce it will report revenues for the division separately from the rest of its businesses to give its communications technology greater visibility to investors.

The current economic slowdown also doesn't help. Last month, the company warned that revenue for the quarter will come to around $6.5bn (£4bn), or 25 percent less than last quarter. The warning -- Intel's second for the same quarter -- came partly as a result of a drop in sales of communications chips. "Currently, everybody is taking a breather" from purchasing communications equipment, but buying will inevitably begin again, Maloney said.

Some Wall Street analysts estimate that Intel derives about 80 percent of its revenue from processors for PCs, and the remaining 20 percent from communications products, such as chips, PC adapter cards and networking equipment to small and medium-sized businesses. The company has used acquisitions to rapidly boost its communications offerings in recent years.

To enter the Internet telephony market, for example, Intel has acquired hardware and software companies, such as Dialogic, DataKinetics and Parity Software. The company has also acquired a raft of communications chips companies such as Ambient Technologies, that focuses on processors for digital subscriber line (DSL) modems; Ford Microelectronics for chips inside cell phones and handheld computers; and Level One Communications, whose technology is being used for Intel's line of processors for networking equipment.

Analyst Michael Wolf of Cahners In-Stat Group said the company's communications efforts have had mixed results so far. For example, Intel has focused on home networking kits, which allow consumers to connect PCs in the home, but the market hasn't taken off as fast as the company has hoped. However, the Dialogic computer telephony products have sold well, Wolf said. "It was smart to focus on communications, and at first they were trying to acquire as many companies as they could. But they've been scattershot," Wolf said. "I think they're starting to get more focus, merging their networking and communications divisions under one common group."

The communications division makes networking equipment, while the networking division makes chips for networking equipment. The company's strategy to a large degree depends upon latching onto existing trends. Voice and data networks are converging, allowing people to make phone calls over the Net. As a result, telecommunications and PC server manufacturers are adopting technologies that rely on the same basic silicon, much of which comes from Intel.

"The communications devices are moving toward the server architectures and servers are picking up some of the router functionality. There is a bit of a collision going on there," Maloney said, adding that a complete overlap between the two industries will nonetheless take longer than previously anticipated.

Like other companies such as Cisco Systems and 3Com, Intel believes the long-touted, slowly emerging Internet telephony market will take off once the industry gives consumers and businesses new phone features they can't get from older phone technology. Unified messaging, which is the ability to check voice mail, e-mail and faxes from a single device, such as a cell phone, is available today, for example. "Voice-over IP is still compelling, but people aren't going to switch (to) voice just to run over a new protocol. Why should they? You don't give a rat's whatever do you?" Maloney said. "The reason why people will switch will be because of value-added services, integrating it (voice) with other services.

"The economics for voice-over IP are still there but people overestimate the rate of change on these things," he said.

Increasingly, these manufacturers also want to migrate to using programmable processors because it will allow them to upgrade equipment more rapidly. Currently, the main competitors in this growing field are IBM and Intel, he noted.

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