Otellini takes over at Intel, fleshes out strategy

At annual meeting, Craig Barrett hands the reins to the chipmaker's fifth CEO--who assures shareholders the PC market remains vibrant.
Written by Michael Kanellos, Contributor on
Paul Otellini took over as CEO at Intel's annual meeting on Wednesday, as the company shed more light on how it sees the future.

Paul Otellini
CEO, Intel

Otellini, a 31-year veteran of the company and the fifth CEO at Intel, told analysts and shareholders that the PC market continues to be a vibrant one.

PC shipments have grown 36 percent in total during the last three years, an increase of 55 million units, he said. Shipments of personal computers are expected to cross the 200 million mark this year, with much of the growth coming from notebooks.

The market, however, is an increasingly international one that will be driven by developing markets, he said. In 1995, Intel had dealers in four cities in emerging countries. Now it has dealers in 1,275 such cities. A decade ago, 15 percent of PCs ended up in emerging nations; today, the percentage has risen to 38 percent.

To this end, Otellini said, the company is trying to develop new products that will fit the circumstances of these markets, both economically and otherwise.

"We found that selling products designed for North America isn't the best recipe," he said. "They need to be much more rugged, much more sensitive to dirt, much more sensitive to power interruption."

Health care represents another large opportunity for Intel, and the company will take a multifaceted approach. One part of the effort will involve wiring hospitals and doctor's offices in an effort to make billing and diagnostics easier, said Andy Grove, the company's outgoing chairman. The chipmaker will also promote Intel-based servers to perform the massively demanding computing tasks required by drug designers and genetic engineers.

A tale of two CEOs
Paul Otellini has taken the
reins from Craig Barrett. Here's
a look at both executives:
Mr. Chips takes final bow
(March 4, 2005)

Barrett: No end in sight for
Moore's Law

(March 1, 2005)

Otellini: Soft-spoken,
driven and an Intel lifer

(Nov. 11, 2004)

Intel board backs Otellini
as CEO

(Nov. 11, 2004)

Paying a price to be No. 1
(Oct. 29, 2004)

Barrett still has some
fight in him

(Oct. 19, 2004)

Meet the new boss, same
as the old boss?

(Aug. 11, 2004)

Barrett weighs in
(June 1, 2004)

Barrett: Tech's challenges
in government

(Oct. 22, 2003)

Otellini named Intel's president
(Jan. 16, 2002)

The company, though, will also try to leverage its expertise in making nanosize transistors for the biotechnology field.

Back in 2003, Intel teamed up with a research outfit to see how semiconductor equipment could be used to detect cancer cell anomalies--but this is the first time Intel has talked about turning projects like this into a commercial enterprise.

"The technology can be used for the analysis of protein structures," Grove said. "We hope to drive them (manufacturing technologies) into product development, probably in combination with people who already have expertise in the area in marketing and sales."

Much of the shareholder meeting, however, was given over to history.

With the promotion of Otellini to CEO, Barrett will become chairman. Grove, meanwhile, will step down as an active member of the board. The fourth employee hired at Intel, Grove served, among other jobs, as president, CEO and chairman.

Otellini differs in many ways from his predecessors. He's the first Intel CEO not to be an engineer. He came out of finance and sales.

On the other hand, like earlier CEOs, he's a lifer, having arrived at Intel after turning down job offers at Advanced Micro Devices and Fairchild, and after obtaining an MBA from the University of California, Berkeley. Before business school, the San Francisco native worked briefly at a law firm and during summers sold snacks in the stands at Candlestick Park.

More important, Otellini has stressed that he has no major plans to change the culture or underlying strategy of the company. Even though the company is now organized around delivering "platforms"--complete bundles of chips to PC and phone manufacturers--these chip bundles will revolve around microprocessors. Otellini also tends to voice the same opinions as his predecessors about the Sarbanes-Oxley Act (it's a bad thing), and U.S. competitiveness (it's declining).

The Barrett legacy
Although he will remain as chairman, Barrett's years of running Intel, first as chief operating officer (1993-1998) and subsequently as CEO (1998-2003), formally came to an end Wednesday.

Craig Barrett
Chairman, Intel

If one had to pick a word to sum up his legacy, "relentlessness" would probably be it. The Hummer-driving, helicopter-flying Barrett tried to take the company into a number of markets--such as Web hosting--with great fanfare and failed. However, when Intel managed to get a toehold in a new field, it methodically exploited its financial and technical resources to gain an advantage.

In server chips, for instance, Intel had a negligible market share in 1995 when the Pentium Pro, the company's first chip specifically designed for servers, debuted. Now, more than 80 percent of servers coming out of factories run on Intel chips.

The server push hasn't gone completely smoothly. Itanium, a server chip promoted by both Grove and Barrett, has been a huge financial failure, and AMD managed to get into the market after Intel overlooked 64-bit chips. Still, Xeon, which debuted in 1998, is the world's biggest-selling server chip.

A similar picture appears in desktops and notebooks. Intel hasn't lost significant market share, despite huge improvements in manufacturing and design at AMD.

"This has been dead flat within statistical limits for seven years," Barrett said during the shareholder meeting, pointing at a chart showing market share.

Intel has begun to colonize other parts of the PC as well. With Centrino, the company added a Wi-Fi chip into the processor and chipset bundle sold to PC manufacturers. In the past two years, Centrino added $5 billion to Intel's gross margin, or dollars after expenses, Otellini said.

This year, the company will begin to promote the Professional Business Platform, which adds a networking chip to the usual bundle sold for desktops.

In a similar fashion, Intel's move into graphics chips flopped, but after the company integrated graphics chips with its popular chipsets, the company became the largest graphics provider in the world.

On the down side, the Barrett years lacked the unexpected successes. An effort to sell consumer electronics failed, twice. Intel vowed to sell processors for cell phones in 2000, and the effort is only just now taking off.

From the beginning of 1999 to the end of 2003, Intel bought more than 35 companies for over $11 billion. Very few of these acquisitions have turned into successful product lines. Much of the technology has later been discarded.

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