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?