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Intel pitches plan to beat chip glut

Facing a market glut of microprocessors and weak corporate demand for PCs running Microsoft’s new Windows Vista OS, Intel hopes to stay profitable by producing new chip designs faster than its competitors, Intel CEO Paul Otellini said Monday.

“There’s clearly more capacity to build microprocessors than there is demand in 2007, and probably in 2008,” Otellini told financial analysts at the Morgan Stanley Technology Conference in San Francisco.

To decrease the impact of a head-to-head processor pricing war with rival Advanced Micro Devices, Intel must return to the quick development habits it used when producing its Pentium family of chips, Otellini said. Intel backed off that pace after producing the Pentium 4, and soon began to lose market share when AMD launched the Opteron chip in 2003.

“We’re doing product refreshes every two years, which is the model we invented, and then stopped doing after Pentium 4, shame on us,” Otellini said. “We fell off it—mea culpa, we screwed up—and now we’re back on that pace.—

The company has announced a pace of upgrading its processor architecture and shrinking its transistor geometry in alternating years. That puts Intel on schedule to upgrade its 65-nanometer Core 2 Duo processor to a “Penryn” 45nm geometry chip in 2007. The following year, Intel will upgrade its Core microarchitecture to the new “Nehalem” model, and in 2009 shrink those chips to an even smaller, 32nm scale.

That strategy will allow Intel to preserve its dominant market share in the processor industry, which has swung in the past 15 years from a low of 72 percent to a high of 87 percent, Otellini said. “Staying in that range is our modus operandi, and the higher end of that range is better than the lower end,” he said.

Excess production tends to force chip prices down, so Intel needs a way to convince buyers it has a unique product. Even in a market glut, customers will continue to buy the top chip in each category, Otellini said. The company plans to do that with its technology platforms, including Centrino for wireless notebooks, vPro for business desktops and Viiv for home media center PCs.

“In terms of pricing, it remains very competitive. But we believe you can show differentiation through platforms. Platforms like Centrino can insulate us from the commoditization of the notebook, just as vPro can insulate us from the commoditization of the desktop,” Otellini said.

Intel needs to push its own pace of development because the market has not produced an expected jump in demand for PCs using Microsoft’s Windows Vista OS.

“Vista will play out like XP did,” Otellini said in reference to Microsoft’s last major OS launch. “People won’t upgrade the OS on the machine, they will buy it on a new machine when they need to do that. I think people will like Vista as they play with it—it’s nicer and prettier. For those who use Macs, it’s closer to the Mac than we’ve seen for a long time.”

Despite that growing momentum for consumer Vista sales, corporate IT managers will continue to migrate more slowly, he said. “I know of no organization that is going to adopt it before Service Pack 1 is out—that’s in the second half of this year—and that includes us. Starting in the second half of this year we’ll do a modest deployment, and continue into next year. That’s the large company approach for all the people I’ve talked to.”

In addition to supplying chips for Windows-based systems, Intel now provides Apple with the processors that power its Macs.

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