Filled with about 100 items that had brought the Santa Clara (Calif.) chipmaker good fortune that year, the time capsule was designed in part to help commemorate Intel's (INTC
) big investments in manufacturing and technology, which had boosted 2003 sales 12.5%, to $30.1 billion, and earnings 81%, to $5.6 billion.
Yet just a year later, worries among investors and employees about Intel's long-term prospects have somewhat overshadowed that celebration. For the first time in years, Intel is feeling a threat to its long-standing dominance of the microprocessor industry. Competitors -- particularly Samsung, Advanced Micro Devices (AMD
), and Texas Instruments (TXN
) -- are getting bolder and, in many cases, growing faster than the world's biggest chipmaker.
GOING UPSTREAM. Intel's empire is hardly in jeopardy, of course. This year, the giant is expected to pour $4.8 billion into research and development and from $3.6 billion to $4 billion into capital spending. It continues to roll out manufacturing technologies, designed to lower per-chip costs, ahead of its rivals.
Intel is also focused not just on microprocessors but also on high-margin sets of chips -- such as Centrino, a chip package that enables notebook computers to connect wirelessly to broadband networks. Barrett & Co. are expected to increase earnings by 6.3%, to $1.18 per share, next year, on sales of $36 billion, up 6.7% from 2004, according to financial service Thomson One.
Yet Intel's share price is off 34% this year, to $21.30. By contrast, AMD's stock is about $14, down only slightly since the beginning of the year. A major reason for Intel's decline is the string of recent execution errors. In July, the company announced it would release its 4-gigahertz Pentium 4 chip in the first quarter of 2005 instead of this year's fourth quarter, as analysts expected.
"WELL DOCUMENTED." Before that, Intel had repeatedly delayed its Prescott chip, pushed back the release of Grantsdale PC chipset (and in September said the chipset would lack a wireless connectivity feature Intel hyped earlier), and canceled its much-anticipated Tejas and Jayhawk desktop and server processors. In August Intel announced that its new chips for digital TVs, which were expected this year, will be delayed until 2005.
Analysts blame the glitches on problems with Intel's manufacturing processes and overeager marketers, who keep jumping the gun before new products are ready. "Those issues have been well documented, as has been the fact that Intel is very focused on executing well," says a company spokesperson.
The miscues, however, may be having a chilling effect as Intel looks for growth in new markets, such as cell-phone processors. "In our markets, you promise, you deliver," says Hans Stork, chief technology officer at Texas Instruments in Dallas. "You can't underdeliver."
SLIPPING MARGINS. Intel's sales growth has slowed in recent quarters. In 2004's second quarter, the company that commands 13% of the world market for semiconductors recorded the slowest year-over-year revenue growth of any top 10 chipmaker, according to chip consultancy iSuppli. Intel's sales grew 20%, to $7.3 billion. But at No. 2 Samsung, semiconductor revenues increased by 84.7%, to $3.6 billion. No. 3 Texas Instruments' chip sales rose 46.8%, to $2.65 billion.
Margins may be slipping, too. In this year's third quarter, for which Intel will report results on Oct. 12, analysts polled by Thomson One expect earnings per share of 27 cents on $8.45 billion in sales. That's above last year's 25 cents on $7.83 billion in sales, but Intel has warned that its gross margins -- for this quarter and all of 2004 -- will likely come in at about 58%, down from the 60% or so it had previously forecast.
Part of what's hurting Intel is changes in tech buying patterns, analysts say. Corporations are increasingly favoring low-end chips, says Steve Kleynhans, vice-president for infrastructure strategies at IT consultancy Meta Group in Stamford, Conn. Many find that even a cheap processor can run 99.9% of their applications but costs hundreds of dollars less.
Plus, Web-based applications, which require little power on the desktop itself to process information, are proliferating. That's already affecting Intel's average selling prices.
LOSING GROUND. "Now, it's less important what's inside," says Mort Rahimi, chief technology officer at Northwestern University in Chicago, who doesn't even keep track of how many of his servers and PCs are Intel-based. "Chips are done so well by both Intel and its rivals, neither of the [companies' products] is going to fail." Given all that, computer makers may, potentially, feel free to opt for non-Intel chips.
Intel remains dominant, but its rivals are gaining. Next year, AMD's earnings are expected to increase by an estimated 31%, to 71 cents a share, on nearly 10% growth in sales, which could reach $5.8 billion, according to analysts polled by Thomson One. That growth is predicted even though 2005 is expected to be the year of a cyclical semiconductor downturn.
During the last such downturn, in 2002, AMD lost $1.3 billion on $2.7 billion in sales. Remainingprofitable when industry growth is expected to slow from this year's double digits to single digits would allow AMD to continue investing in R&D and expand into new markets such as China.
KOREAN THREAT. AMD is clearly catching up on Intel in several categories. Over the past two years, AMD has become known as the innovator in computer processors, thanks to its 64-bit chips, which allow applications to run more efficiently. AMD is also grabbing share from Intel in areas such as chips for servers. Last year, it joined forces with Fujitsu on flash memory, giving it a memory-chip operation that's bigger than Intel's. And this summer, AMD opened three new design centers, in Boston, India, and Japan (previously it had only two, in California and Texas).
Samsung, which aims to displace Intel as the world's No. 1 chipmaker, may pose an even greater threat. This year, for the first time ever, the Korean company is set to spend more money -- $6.8 billion -- on capital improvements to its various semiconductor and display facilities than Intel, which said it would spend up to $4 billion. It's the first time in recent memory that Intel hasn't led the pack in such spending. Samsung plans to pour almost $20 billion into R&D and manufacturing improvements through 2006, says Jon Kang, senior vice-president for technical marketing at Samsung Semiconductor USA in San Jose, Calif.
Intel is looking to goose its growth rate by wading further into markets other than its bread-and-butter chips for PCs. Among them are consumer electronics and mobile phones, where Samsung has been a hands-down success. On Sept. 20, Intel's venture-capital arm, Intel Capital, invested in five startups making software and networking gear that enable consumers to easily move movies, songs, and photos between their PC, TV, set-top box, and other home devices. On Oct. 5, Intel announced it will be working with cell-phone heavyweight Nokia (NOK
) on next-generation mobile phones.
But these efforts could take several years to pay off. That's what will make digging up Intel's time capsule so interesting. Will the artifacts buried there represent just another chapter in this chip legend's history -- or a key turning point, when Intel's long-term dominance had started to wane? Kharif is a reporter for BusinessWeek Online in Portland, Ore.