Inside Intel

Paul Otellini's plan will send the chipmaker into uncharted territory. And
founder Andy Grove applauds the shift

Even the
gentle clinking of silverware stopped dead. Andrew S Grove, the revered former
Intel chief executive and now a senior adviser, had stepped up to the microphone
in a hotel ballroom down the street from Intel's Santa Clara (Calif.)
headquarters, preparing to respond to a startling presentation by new chief
marketing officer, Eric B Kim. All too familiar with Grove's legendary wrath,
many of the 300 top managers at the Oct. 20 gathering tensed in their seats as
they waited for a tongue-lashing of epic proportions. “No one knew what to
think,” recalls one attendee.

The reason? Kim's
plan, cooked up with new CEO, Paul S Otellini, was a sharp departure from the
company Grove had built. Essentially, they were proposing to blow up Intel's
brand, the fifth-best-known in the world. As Otellini looked on from a front
table, Kim declared that Intel must “clear out the cobwebs” and kill off
many Grove-era creations. Intel Inside? Dump it, he said. The Pentium brand?
Stale. The widely recognized dropped 'e' in Intel's corporate logo? A
relic.

Grove's deep
baritone, sharpened by the accent of his native Hungary, pierced the expectant
silence. But instead of smiting the Philistines, Intel's patriarch sprinkled
holy water on Otellini's plan. He understood that it was no repudiation of
him, but rather a recognition that times had changed-and that Intel needed to
change with them. “I want to say,” he boomed, “that this program strikes
me as one of the best manifestations incorporating Intel values of risk-taking,
discipline, and results orientation I have ever seen here. I, for one, fully
support it.”

Fresh Fields Otellini will soon unveil a new logo and a host of new products

As executives rose to
greet him with relieved applause, the moment signaled an historic shift for one
of the world's most powerful technology companies. The iconic Intel would
leave the Grove era behind and head into uncharted territory. Otellini will
unveil the new strategy and new products on Jan. 5, at the Consumer Electronics
Show in Las Vegas. Central to the effort will be the first new corporate logo in
more than three decades and a $2.5 bn advertising and marketing blitz,
BusinessWeek has learned.

The changes go far
deeper than the company's brand. Under Grove and successor Craig R Barrett,
Intel thrived by concentrating on the microprocessors that power personal
computers. By narrowing the company's focus, the duo buried the competition.
They invested billions in hyperproductive plants that could crank out more
processors in a day than some rivals did in a year. Meanwhile, they helped give
life to the Information Age, with ever-faster, more powerful chips.

Otellini is tossing
out the old model. Instead of remaining focused on PCs, he's pushing Intel to
play a key technological role in a half-dozen fields, including consumer
electronics, wireless communications, and health care. And rather than just
microprocessors, he wants Intel to create all kinds of chips, as well as
software, and then meld them together into what he calls 'platforms.' The
idea is to power innovation from the living room to the emergency room. “This
is the right thing for our company, and to some extent the industry,” he says.
“All of us want to be more powerful and to be simpler, to do
stuff for us without us having to think about it.”

Why the shift? Stark
necessity. PC growth is slowing, even as cell phones and handheld devices
compete for the numero uno spot in people's lives. Otellini must reinvent
Intel-or face a future of creaky maturity. Revenue growth has averaged 13% for
the past three years, but analysts figure Intel will see only 7% growth in 2006,
to $42.2 bn. Meantime, profits, which have surged an average 40% annually over
the past three years, are expected to rise a measly 5%, to $9.5 bn. “It's a
race for Intel and other companies to figure out how fast is revenue going to
come from emerging areas before PC margins begin to come down sharply,” says
Ragu Gurumurthy, head of technology practice for Boston tech consultancy,
Adventis.

20,000 New Faces

Intel has tried entering new markets in the past, particularly under
Barrett. Yet it always treated them as tangential and never let them detract
from the core processor effort. Not anymore. Otellini, who took over as CEO in
May, has reorganized the company top to bottom, putting most of its 98,000
employees into new jobs. He created business units for each product area,
including mobility and digital health, and scattered the processor experts among
them. He has also added 20,000 people in the past year. The result? Intel is
poised to launch more new products in 2006 than at any time in its history.

Intel's culture is
changing, too. Under the charismatic Grove, who was CEO from 1987-1998 and then
chairman until 2005, the company was a rough-and-tumble place. Grove's motto
was “Only the paranoid survive,” and managers frequently engaged in
“constructive confrontation,” which any outsider would call shouting.
Engineers ruled the roost. Grove and Barrett also instituted the practice of
doling out cash to PC makers for joint advertising, which Intel rivals have
alleged blocks them from some markets.

Otellini is more
diplomatic, partly by nature, partly by necessity. The intensely private
55-year-old rarely reveals irritation-and then, with a slight frown. His
management mantra: “Praise in public, criticize in private.”

He's also is the
first non-engineer to run the company. Otellini studied economics in college at
the University of San Francisco and then joined Intel in 1974, straight out of
B-school at the University of California at Berkeley. Many of the new employees
he's bringing on aren't typical Intel hires either. They include software
developers, sociologists, ethnographers, even doctors to help develop products.
He lays particular emphasis on marketing expertise because he thinks the only
way Intel can succeed in new markets is by communicating more clearly what the
technology can do for customers. “To sell technology now, you have to do it in
a way where it's much more simple,” says Otellini. “You can't talk about
the bits and the bytes.”

Remaking Intel From Top To Bottom Marketing is becoming as important as engineering, a big shift for the company Grove founded

Motto 'Only the paranoid survive' 'Praise in public, criticize in private' Strategy CEO from 1987 to 1998, Grove is best known for the high-stakes decision to leave the money-losing memory-chip business and focus on developing microprocessors for PCs and servers. That helped Intel bury its competition, with ever-faster processors. Otellini says that Intel has to move beyond microprocessors and that speed alone is no longer enough. Instead, he wants to create “platforms” of microprocessors combining silicon and software that lead to new devices and technologies. Branding Created the Pentium and 'Intel Inside' branding that highlighted the computer's guts for first time. Created the 'Leap ahead' logo, Intel's first new corporate logo in more than 30 years. Management Style Direct and confrontational. His shouts echoed down company halls. Direct, with encyclopedic knowledge, but so softspoken you sometimes strain to hear him. Partners Working closely with Microsoft, Intel concentrated on wooing PC industry giants such as Dell, Compaq, IBM, and HP. Everyone and everything, from Cisco in networking to Motorola for mobile devices to hospitals for digital health. How employees Got ahead Engineers ruled, based largely on their skillsrunning divisions within the core PC business. Marketers and even ethnographers are on equal footing with chip engineers Roots A Hungarian Jew whose family narrowly escaped the Holocaust and later fled the Iron Curtain. Son of Italian immigrants who initially wanted him to become a priest in San Francisco. Office Instituted 'signing sheet' for people who were more than five minutes late for work. A decentralized organization where BlackBerrys and e-mail are the primary ways to reach employees. Vittles Headquarters cafeteria offered stale sandwiches, bland food. A revamped canteen, which now serves up sushi and made-to-order lunches.

The changes have
created some angst among employees. In particular, many high-level engineers
working on PC products feel they've been stripped of their star status. “The
desktop group used to rule the company, and we liked it that way,” says one
former chip designer, adding that some engineers now feel “directionless.”
Other employees are simply uncomfortable with the new emphasis on marketing.
“There definitely are people who are highly skeptical, who think this is all
fluff, all just gloss-that if you make good technology, you don't need the
glitz,” says Genevieve Bell, an in-house ethnographer who researches how
people in emerging markets such as China and India, use technology.

Yet, Intel and
Otellini aren't shying away from glitz these days. For its bash at the
Consumer Electronics Show, the company has booked the hip-hop band Black Eyed
Peas, with its hit Let's Get It Started. Beforehand, Otellini will unveil the
new Intel during his keynote speech. It starts with a whole new look for the
37-year-old company. The Intel Inside logo will disappear, replaced by an
updated Intel logo with a swirl around it to signify movement. For the first
time since the early 1990s, the company will add a tagline: 'Leap ahead.'

Meantime, the famous
Pentium brand will be slowly phased out. In its place: a troika of brands, two
of them freshly minted. Viiv (rhymes with 'alive') is the name of a new chip
for home PCS, designed to replace your TiVo, stereo, and, potentially, cable or
satellite set-top box. It will be able to download first-run movies, music, and
games, and shift them around the home. Intel also will launch a set of notebook
PC chips under the three-year-old Centrino brand, as well as so-called dual-core
chips, which will put two processor cores on one sliver of silicon. The new
brand 'Core' will be put on products that don't meet the specifications of
the Viiv or Centrino platforms. The effort is winning high-profile support. On
Jan. 10, Apple Computer, which has never used Intel's chips before, is
expected to be one of the first companies to offer products with the dual-core
chips.

One of Otellini's
key steps in all this was hiring Kim away from Samsung Group a year ago. Kim had
led Samsung's marketing since 1999 and helped build the Korean maker of
consumer electronics, cell phones, and computer chips into a hot global brand.
But Otellini didn't just swipe a major talent away from the company that's
increasingly seen as Intel's prime competitor. By hiring an outsider who
reports directly to the CEO for the first time in Intel's history, Otellini
also got someone who could play bad cop and push through unpopular changes when
necessary. Rank-and-file employees do grumble about Kim and what they consider
his autocratic style, but he makes no apologies. “I tell people they're not
just about making silicon. They're helping people's lives improve, and we
need to let the world know that,” says Kim.

Yet it's a daunting
task, especially for a company that has never had much success outside the
computer industry. Companies that have been good at transforming themselves,
from Nissan and Apple to Texas Instruments, typically need a crisis to
precipitate change, says management expert Jay R Galbraith of Galbraith
Associates. And although Intel is facing a possible slowdown, it's still
pulling in nearly $1 bn a month in profits. “Change is really hard when
you're solidly on top,” says Galbraith. “He'll have to bring in new
people who have new skill sets.”

A Mean Pack

Competitors keep nipping at Intel's flanks. Longtime rival Advanced
Micro Devices in 2003 launched its Opteron and Athlon 64 chips, outgunning Intel
in both raw power and lower power consumption. AMD's market share rose to
17.8% last quarter, up from 16.6% in early 2003, and some analysts predict it
will gain more until Intel fields competitive chips in late 2007. AMD CEO,
Hector J de Ruiz equates Intel's position with that of American automakers,
scrambling to find innovation even as consumers flock to Japanese rivals.
“People are smart enough to pick quality when given a choice, and calling
something a platform doesn't guarantee quality,” Ruiz says.

In the cell phone
market, Texas Instruments and Qualcomm Inc have held fast against Intel's
incursions. Intel's executive vice-president, Sean M Maloney once wore
snowshoes to a company sales conference to illustrate the deep slog. In 2006,
AMD and TI plan to field their own chip platforms aimed at capturing some real
estate in the digital home.

So Otellini is shaking
things up throughout the company. In addition to the reorg, he's making big
changes in the way products are developed. While in the past engineers worked on
ever-faster chips and then let marketers try to sell them, there are now teams
of people with a cross-section of skills. Chip engineers, software developers,
marketers, and market specialists all work together to come up with compelling
products.

One example of the new
approach is Bern Shen. A doctor who practiced internal medicine for 15 years, he
joined Intel three months ago to help develop technologies for digital health.
He works with Intel's ethnographers to figure out which technologies might
help in monitoring the vital signs of the elderly or tracking the diet of people
with Alzheimer's. “The fact that they hired me is an indication of the new
Intel,” he says.

Otellini is convinced
such collaboration will lead to breakthrough innovations. He imagines a day when
people will use Centrino laptops to watch live TV on the subway or when kids
will be able to download Spider-Man 3 to their home theater on the same day
it's released worldwide. Shen's work could lead to Intel technology that
allows the elderly to keep living at home, even as data on their vital signs are
zapped to doctors several times a day. “This is the right model,” Otellini
says. “Now it's just a matter of playing it out.”

If the world buys
Otellini's ideas, industries from Hollywood to health care could be turned
upside down. Media and entertainment may be forced to rethink their business
models. The health industry could be transformed, as doctors diagnose or even
treat patients remotely. “The most important thing about Intel is that
they've got the vision,” says Russ Bodoff, executive director of the Center
for Aging Services Technologies (CAST), a coalition of 400 companies,
universities, and hospitals. “They are pushing some very innovative
approaches, in areas that relate to dementia, Alzheimer's care, and
Parkinson's disease.”

The ultimate goal: To
provide the manufacturers of everything from laptops and entertainment PCs to
cell phones and hospital gear with complete packages of chips and software. The
template is Centrino. When Otellini was leading product planning in the core PC
business from 1998 to 2002, he decided that rather than roll out just another
fast processor, he would bundle it with a relatively new wireless Internet
technology called Wi-Fi. The combo made it a breeze for people to connect to the
Net from airport lounges and coffee shops. Backed with an initial $300 mn
marketing campaign, Centrino notebooks became an instant hit, revitalizing the
PC market and persuading consumers to snap up the higher-margin products.

Now, a Giant Step

Still, Intel's first big success in diversification was only a
half-step away from the core PC market. Will it be able to do as well in other
areas? Consider Viiv. In the consumer electronics market where Viiv devices will
be positioned as an all-in-one DVD player, game console, TiVo, and music
jukebox, it faces plenty of big-name competitors. Meanwhile, brand-new
challengers are appearing on the horizon. Sony, with its PlayStation 3 due out
in just a few months, aims to offer games, movies, and music on the device,
which uses chips from IBM. Cable and satellite providers such as Comcast and
DirecTV Group are adding more features and services to their set-top boxes, such
as on-demand television shows and XM satellite radio.

Cutting through the
clutter of competitive activity is why Otellini and Kim have lifted branding to
new heights at Intel. But for a huge company such as Intel, it will be
especially tough. “In many ways, it's like trying to change the engines on
an airplane when you're flying it,” says Russ Meyer, chief strategy officer
for branding consultancy Landor Associates. Companies must try not only to
differentiate themselves from competitors but also to align internally to make
sure the same message is clear to employees. For an 'ingredient' brand such
as Intel with no products that a consumer actually can pick up from the local
Best Buy or Wal-Mart, the trick also is to convince new customers of the value
of using its products.

With that in mind,
Otellini's Digital Home team has struck some of the biggest content deals to
date with major Hollywood players and music services to entice both customers
and consumers to the Viiv platform. The hundreds of millions it will dole out
for marketing Viiv has partners such as Sony and Philips Electronics salivating.
They also seem to be genuinely impressed with the new attitude at Otellini's
Intel. “I have seen more flexibility, more of an open mindset than in years
past,” says Sony vice-president, Mike Abary, who heads the company's Vaio PC
business. “They realize that times have changed, that they don't have all
the answers. So it has been much more collaborative working with them.”

Otellini also has gone
to great lengths to win over marketing maestro Steve Jobs. It's quite a
reversal. For years, Grove and Barrett pooh-poohed Apple as a niche company
whose products had sleek form, but nowhere near the function of computers with
Intel's chips. Yet Otellini set about wooing jobs almost from the start. In
June, a month after Otellini took over, the two companies announced Apple would
begin shipping Macs and other products with Intel chips inside in 2006. Otellini
aims to use the Apple relationship to force PC makers to step up their
innovation. “They've always been a front-runner in design,” he says. “As
they start taking advantage of some of our lower-power products, that form
factor will improve significantly. I think it will help drive a trend toward
smaller, cheaper, cooler.”

Jobs's influence
extends beyond design. At Otellini's urging, Apple's 'Think Different'
vernacular is beginning to take root inside Intel. The two chief executives also
appear to be developing a real friendship. Intel insiders say they talk
regularly. And when Prince Charles and his wife, Camilla, visited Silicon Valley
in late November, Jobs and Otellini were side by side, hobnobbing with the
royals.

The Apple relationship
could create some strain with Intel's two old compadres in the PC business,
Dell and Microsoft. Dell has been one of Intel's most loyal customers: It's
the only major US maker of PCs that hasn't come out with boxes powered by AMD
chips. So if Intel provides strong support for Apple in the PC business, it
could prompt Dell to do business with AMD'S Ruiz. Dell is going after more
consumer business, Apple's primary turf. In late 2005, Dell introduced a
higher-end XPS line and it plans to ship Viiv PCs.

Meantime, Intel execs
seem open to easing their once ironclad ties to Microsoft. At the start, PC
makers will have to use Microsoft's Windows Media Center Edition operating
system to earn the Viiv brand-and Intel's co-marketing dollars. But Intel
says this may not continue, opening the door to Viiv machines with the Linux
open-source operating system or even Apple's. Indeed, Kim says he expects some
PC companies to ship Viiv boxes, without Windows.

Another budding
relationship in Intel's march on new markets is with Google. Otellini joined
the search company's board in April, 2004, and has found a few areas of joint
interest. For one, Otellini heard that Google's energy bill for its servers
now exceeds the cost of the equipment. (With 100,000 servers, Google's
electricity bill probably tops $50 mn a year.) That prompted Otellini to explore
the prospects for energy-efficient chips. In August, Intel announced it would
dump its old architecture in favor of lower-power chips in 2006.

Outsiders Welcome

To bolster the push, Otellini is looking to recruit more execs from
outside the company. In the past year, Maloney hired Nokia veteran, Steven Gray
as a key member of the cellular team. And Maloney is turning more often to Intel
vice-president, Sam Arditi, a cellular industry veteran with experience in radio
chips and processors-key ingredients in handsets.

The result: closer
ties with Nokia and Samsung, which are both collaborating with Intel on WiMax.
In September, Maloney also announced a deal with Research In Motion, making it
the first major name to use its cellular platform of radio, processors, and
memory. “The relationship is going to be very important to RIM,” says co-CEO
Jim Basillie.

For all that,
Otellini's internal challenges may prove more daunting than the external ones.
For one, PC chip development still casts a long shadow at the company. During
Grove's and Barrett's tenures, anyone not producing for the core PC business
was considered a second-class citizen. Barrett described the problem as akin to
the creosote bush, a tall desert plant that drips poisonous oil, killing off all
vegetation that tries to grow nearby. Microprocessors so dominated the
company's strategy, he says, that other businesses could not sprout around it.
That was one reason Otellini reorganized into product areas.

The shake-up hasn't
helped company morale, though. Especially hard-hit were the engineering teams in
California and Texas, which had been working on the Pentium 4 until Otellini
canceled it. Some of the design specialists have quit for new jobs, often with
AMD or TI. To smooth over the troubles, Otellini has toured the chipmaker's
outposts, talking with engineers and others without their managers around. “A
lot of what he heard was pent-up frustration, no doubt,” says one engineer.
“But you appreciate the fact that he's listening.” Intel's attrition in
2005 was 4%, about average for the tech industry.

Sniping about the rise
of marketers such as Kim continues. Says Schmuel 'Mooly' Eden, an Israeli
engineer who helped spearhead the Centrino launch and now heads marketing for
the Mobility Group: “When I went back to Israel to talk to some of the
engineers, they said: 'You're only one year in marketing, and already
you're brain-damaged.”'

As Intel gears up for
its big bang of product launches, there's no doubt the mantle of leadership
has shifted. This year, Otellini, for the first time, will write a performance
review for Grove. In his advisory role, Grove sits in on important meetings,
particularly in digital health, and gives his thoughts. Asked about the
prospects of critiquing the company legend, Otellini just laughs. Reviewing
Grove will be a breeze next to the challenge of remaking the world's largest
chipmaker.

By
Cliff Edwards