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Chips & Salsa: Will Intel Be a Bigger Internet Player?

Dear Andy:

In the movie "The Graduate," there's a famous line about "plastic" being the future. Of course what Intel (NASDAQ:INTC) discovered was that the future was really silicon. But now that the Internet comes alive we wonder if Intel's future is in the global computer network?

The "CPU" of the network may not be silicon, but the smart router or switch. In other words are you paranoid enough?

If not then perhaps Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), and MCI (NASDAQ:MCIC) may be your biggest threats. In the emerging business blender that's on full speed, the lines between hardware and software blur. Example: Compaq and HP getting into the Internet service provider business. Another: 3Com's modems being updated via the Internet and flash software updates. Let's consider that as a foreshadowing of possible things to come.

Intel's busy constructing billion dollar fabrication plants to produce smaller, faster chips for all of this to run on. But what if chips become upgradable via the Internet? What if that 333 megahertz Pentium can be sped up to 400 mHz with a zap down the modem? Impossible today with today's limited technology.

Even if this could be done, it would probably be Intel doing the zapping. But what happens to margins if a flash is all you sell once the silicon sits in the PC? 3Com gets about $60 per customer upgrading from 33.6 to 56.6 via the Web. Incremental revenue. Distributed chip doping on the fly, subscription based, and no need for rubber suits and hospital masks in the lab. Maybe that's science fiction, but we doubt it. If not possible now, then perhaps in 10 or 20 years. The economics of it are too powerful.

Beyond zaps, we expect the Asian chipsters to come on strong with chips for every sort of device connected to the Web (or the next generation Web--the one that's continually phased in). So being number one in PC chips is fantastic and Intel's management is the best example in the world of a tight ship. You fly coach on airplanes, not wanting to waste shareholder dollars. Bravo.

If anybody gets "it" it's you. Here's the twist: Microsoft invests in producing various Web-based businesses and services to extend its revenue and earnings model. It's not applications the company is after. It's the ability to shave dollars off every move on the Net. Every click of the mouse from word processing to e-mail to travel, and so on.

That's the margin play. Adam Smith's invisible hand ends up being the Wizard of Ahs, Bill Gates. Intel holds investments in a few Internet companies--C|NET (NASDAQ:CNWK) and CMG Info (NASDAQ:CMGI) come to mind. We don't quite understand the CNET angle, but CMG perhaps is clearer.

With its hands in many Internet startups, CMG, despite its direct marketing side, is a public venture capital outfit focused on Internet investments. Intel's 4.9% of CMG is a proxy for a very small slice of companies CMG invests in: About 50% of Lycos (NASDAQ:LCOS), positions in GeoCities, Blaxxun, ADSmart, Engage Technologies, InfoMation, NaviSite, Planet Direct, SalesLink, The Password, Koz, Parable, PlanetAll, Reel.com, Silknet, Softway Systems, Speech Machines, and Vicinity to name most of them. There's also the Intel-CAA media lab. All these drive chip sales to a various degree. Still a one-product company, however, even though you're the best at it.

We had Intel's Avram Miller, Corporate Vice President, as a guest at Spring Internet World last year. He showed us a great vision of content, audience, commerce, and platform. Central to it all was the chip. We wonder if Intel will ever get into the salsa side of things?