Is This The Right Man For Intel?
Everybody says CEO-elect Paul Otellini is no technologist. Well, guess what? A numbers guy who thinks like a marketer might be just what the venerable chip giant needs.
(FORTUNE Magazine) – No. 50
Andy Grove, the great ex-CEO of Intel, is talking about Paul Otellini, his onetime aide who is set to become the chip pioneer's fifth chief executive on May 18. And Grove is annoyed. "Bullshit!" he says. Parroting a remark I've heard repeatedly interviewing people about the new boss, I've just asked if it matters that Otellini is not a technologist. Current and former Intel insiders, Wall Street and industry analysts, competitors, and customers--they all make the same obvious point about Otellini, whose background is in finance and marketing.
Grove retorts it is "superficial" to focus on Otellini's lack of an engineering degree. "Paul is a self-taught technologist. He knows the products better than I ever did," Grove says. Craig Barrett, Intel's current CEO, is also quick to argue for the new guy. It's a plus, he says, that Otellini is "not so steeped in the basic technology as some of us were"--because that's not what Intel needs today.
Saying Intel's first four CEOs were steeped in basic technology, of course, is a bit like saying the Pope is comfortable with the catechism. Bob Noyce, Intel's first CEO, co-invented the integrated circuit. Gordon Moore lent his name to the law that continues to define the industry's daunting rate of technological progress. Grove is a polymath engineer. And Barrett, who'll ascend to chairman when Otellini becomes CEO, was a Stanford professor who wrote a textbook, The Principles of Engineering Materials, before going corporate. Paul Otellini? He studied economics as an undergrad, picked up an MBA (his thesis was on interest-rate arbitrage), and got his start at Intel crunching numbers.
There would be a lot less chatter about the new CEO's background if Intel weren't struggling to find new ways to grow. Let's not exaggerate: As the world's top chipmaker, Intel still has a near monopoly on microprocessor chips and is an amazing money machine--it generates about $700 million of cash each month, earned $7.5 billion last year on sales of $34 billion, and with a market cap of $145 billion, is a core technology holding for investors around the world. But lately the company has gotten nowhere in its hoped-for growth markets, notably chips for cellphones. It has suffered a series of embarrassing product cancellations. Multibillion-dollar acquisitions have generated negligible returns. And embarrassingly, Advanced Micro Devices, its considerably smaller rival, has soundly beaten Intel in the design of the current generation of chips for high-performance PCs and servers. In the 1980s and 1990s sales leapt at an average annual rate of 20% as Intel chips powered the PC boom, the Internet boom, and the global expansion of infotech. But in 2000 sales sank 21%, and the annual increases in the years since have been 1%, 12%, and 14%. Intel's share price, despite having revived from a post-bubble low of $13 in 2002, has been stuck lately at around $23, roughly where it traded back in late 1998.
Sheer bigness is partly to blame for Intel's slowdown, of course--its current rate of growth, for instance, means adding the equivalent of an AMD every year. Also to blame is the fact that the PC market has matured, and tech's hottest growth is in areas where Intel largely isn't, like TVs and cellphones. Yet Intel isn't about to settle for a sedate middle age--it can't. As chip technology continues its relentless advance in this hugely capital-intensive business, the company needs new products, or new markets for its existing products, to keep its multibillion-dollar fabs running at capacity.
Nobody understands the urgency better than the incoming CEO. "We're genetically programmed to be a growth company," says Otellini. "We're not interested in doing anything else." And if you listen to Grove and Barrett and study Otellini's track record, you come to understand why Intel picked him. It doesn't need another great technologist. Instead it needs a dispassionate numbers guy, someone who understands both how to listen to customers and how to package products for new markets; who isn't driven purely by engineering passion; and who knows that Moore's law is not only something to exploit but also something to fear. For better or worse, Intel needs Paul Otellini.
Otellini has lived his whole life within a 150-mile radius of Silicon Valley. He was born in San Francisco, where his grandparents had immigrated from Italy--Otellini recalls his grandmother telling him about living in a tent following the 1906 earthquake. (The pronunciation of his name, by the way, is frequently botched; it begins oh as in oh my gosh, not ah as in ah-choo.) "At least that's how my grandfather said it," he says. The son of a butcher, Otellini attended the city's prestigious St. Ignatius College Prep, a Jesuit school. He played football, though he says he wasn't a standout, and held down numerous jobs, including hot dog vendor at Candlestick Park and stock boy in a clothing store. Because his father wanted to impress upon him the importance of going to college, he even did a stint in a slaughterhouse. ("I became intimate with the hog depilator," he says.) He lived at home throughout his four years at the University of San Francisco, another Jesuit institution. The Catholic Church figures prominently in Otellini's life: He's a former altar boy; his brother Steven is a former Vatican diplomat and currently pastor of a church in Menlo Park, Calif. For business school, beginning in 1972, Otellini ventured as far as Berkeley, but the antiwar ferment in People's Park failed to distract the young future executive.
Otellini signed on at Intel in 1974 as an analyst in the finance department and began rising quietly through the ranks. He had a knack for being in the right place at the right time. In the early 1980s, for example, he was assigned as a sales rep to the IBM account just as IBM became Intel's largest customer. His modesty made him something of an anomaly at Intel. "It was nice to have a guy who was aggressive and smart but who didn't have a huge ego," says Grove, who counts himself among Intel's many anything-but-shy executives. Agreeing in 1989 to be Grove's "technical assistant" was an unusual move for a 38-year-old who had already risen to general manager. Peers teased Otellini that he'd be Grove's "foil boy," a pre-PowerPoint derogation for the schlepper who prepares the CEO's presentations. But Otellini showed himself to be both a good analyst and an adroit diplomat. His first assignment was to write a postmortem for the board on a failed joint venture with Siemens. Insiders joked that the project, called BiiN, stood for "billions invested in nothing," but reputations were riding on Otellini's report, and he managed to analyze without prejudice what had gone wrong. "He had a relatively delicate task in that people had put their careers on the line," recalls Dave House, a senior Intel executive at the time who went on to run Bay Networks. "He was honest and nonpolitical. Paul is really about getting the job done."
By the early 1990s, Otellini was running microprocessors, Intel's biggest single division. In 1994 Barrett asked him to run companywide sales and marketing, a lateral move Otellini opposed so vehemently that he drafted an eight-page memo on why he shouldn't do it. By then his bosses regarded him as a potential CEO; the assignment was intended partly to make him stretch, explains Barrett: "He loved what he was doing and was having a great time; I was giving him a challenge." After the initial protest, Otellini took the job. "He eventually got to the right answer," quips Barrett.
Before long Otellini's flair for product marketing helped solve a major headache. Around 1997, PC prices were inching below the unheard-of low price of $1,000, which threatened Intel's margins. It was Otellini who came up with the concept of segmenting the Pentium line, reserving the Pentium brand for high-end chips and creating a new brand, Celeron, for sub-$1,000, lower-performance versions. "It was effective in sheltering the Pentium brand's premium at a higher price point," says Carl Everett, who worked with Otellini at Intel and then, after joining Dell, became a major customer.
By 2000, Otellini was running the Intel Architecture Group, which accounted for most of the company's revenues. There he successfully fought with engineers over the need to create Centrino, Intel's wireless brand. In typical Intel tradition, the engineers were bent on designing a faster, more powerful processor. Otellini was convinced that users of laptops already had plenty of power and speed--what they cared about was heat generation, battery life, and wireless capabilities. He won, and Centrino paid off. Not only has it been a giant success, but it is now the model for the way Otellini is reshaping all of Intel's businesses.
Otellini's Jesuit training shows in the way he talks--softly and carefully, often allowing many seconds to pass before answering a question. With his tired-looking eyes and unremarkable corporate attire, he exudes neither Andy Grove's charisma nor Craig Barrett's forcefulness. He would much rather discuss Intel and its brands than himself any day. His initial interview with FORTUNE occurred two days after Hewlett-Packard fired its rock- star CEO, Carly Fiorina. Without mentioning her directly, Otellini made it clear that he intends to be a different kind of leader. "I'm absolutely going to resist the temptation to do the high-profile thing," he said. "That's never been Intel's style. And it's not my personal style. I'm just going to do my job, and hopefully life has its own rewards as a result."
So how does he plan to get Intel back on track? Otellini's idea for spurring growth is deceptively simple. He wants to stand Barrett's strategy of diversifying beyond microprocessors on its head and instead push Intel's microprocessors into new markets.
To be fair, Barrett has much to be proud of. During the massive tech downturn of the past four years he has kept Intel solidly profitable, avoided layoffs, and invested a staggering $37 billion in new factories and R&D. But the diversification approach hasn't worked well. In 1999 and 2000 alone, Barrett spent more than $8.7 billion on 28 acquisitions. Yet today, Intel's share of the targeted markets is infinitesimal: 6% in networking chips, 7% in the chips that make up the computing innards of cellphones. Homegrown efforts haven't fared much better. And Intel's track record in 2004 was downright embarrassing: The company killed a project to make chips for digital televisions; numerous products were delayed, including Prescott, the latest Pentium version for desktops; and Intel all but admitted defeat in its Itanium chip-design project with Hewlett Packard. "You couldn't have scripted a worse screenplay than Intel had in 2004," says longtime Wall Street chip analyst Hans Mosesmann.
Certainly Intel doesn't have quite the swagger it once had. Atik Raza, former president of AMD and now a venture capitalist, thinks Otellini has the skills to refocus the company. "Intel's meanderings will reduce under Paul," he says. "You will see a sense of purpose once he has totally taken control."
First and foremost, the company faces a technology challenge: rethinking its approach to Moore's law to take into account the lessons of the Centrino. Although Intel's engineers, amazingly, are still able to double the number of transistors they pack onto a silicon wafer every two years or so, Moore's law alone is no longer the formula for commercial success. The metaphor around Intel is that the company has been producing Ferrari engines for users who merely want to drive to the supermarket.
This is why, since as far back as 2001, Otellini has been pushing for Intel to make a "right turn." No longer should it focus on processor speed for speed's sake alone. Instead it should listen to what customers want--the way a marketer, not an engineer, would approach designing products. "People still want performance, but they want other things, and we need to deliver and discuss performance in a different way," says Otellini. Now that he is becoming boss, Intel engineering is all about catering to customers. Call it the Otellini amendment to Moore's law: "This is the first time in Intel's history where the product orientation of Intel is outward-facing," he says.
In January, Otellini announced a companywide reorganization that reflects his plan. Before, Intel's corporate structure had two buckets: microprocessors and communications chips. Now, even though most of its revenues still come from those two buckets, the company is organized around four end markets--enterprise; home; mobility, which means most of Intel's cellphone chips plus wireless chips for notebook computers; and chips for health care, a new focus for Intel. (A fifth unit focuses on customizing products for particular countries or regions.)
Otellini wants each unit to develop its own branded package of chips--he calls them platforms. Again, that's where the example set by Centrino comes in. If you look under the label, Centrino is actually a clever repackaging of an Intel processor--the Pentium M--with other components, notably a radio chip for sending and receiving data. Through the Centrino marketing campaign, Intel helped sell the world on wireless computing. Centrino has generated $5 billion in revenue since its inception in 2003.
The test of Otellini's approach will be for Intel to create equally lucrative clusters of components in devices that aren't personal computers. Successful as Centrino is, it really represents a line extension rather than a new category of product. Intel's next challenge is to build a platform for what it calls the digital living room. That's geekspeak for cable and satellite set-top boxes, digital TVs, and digital video recorders--a vast market the IT industry has been circling for years with limited success. Intel wants its microprocessors to be the brains inside those devices. "Intel is deadly serious about this market," says Don McDonald, one of two executives running the new Digital Home business unit.
But McDonald and his Digital Home team know better than to expect a welcome mat for their sets of chips. Consumer-electronics manufacturers are well aware of the way Intel and Microsoft sucked up most of the profits in PCs, and if they aren't aware, Intel's rivals will happily remind them. "Intel wants to control the complete ecosystem," says Hector Ruiz, AMD's CEO. If Intel succeeds, he adds, "they can get huge margins, which is another way of saying they screw their customers. If the hardware manufacturers of the world--the Sonys, the HPs, the IBMs--don't give a damn about their brands, then Intel's strategy will succeed. But if they do care, they ought to be petrified."
The new Mobility division also faces an uphill battle. In the market for cellphone chips, Intel has made almost no headway against Texas Instruments and Qualcomm, the leading suppliers of application processors, which are to cellphones as microprocessors are to computers. "I respect Intel--their process technology and their money," says Texas Instruments CEO Rich Templeton. "But the primary place we see Intel is when we meet with the press. We have competitors that we need to wake up in the morning and worry about," he adds, and he ticks off a list that includes Qualcomm and Broadcom--but not Intel.
Progress has been so slow that rumors circulate periodically that Intel will get out of cellphone chips altogether. No way, says Sean Maloney, who has run the communications segment since 2003 and is co-head of the new Mobility group. He is a native of Ireland who, like Otellini, is a former chief of sales and marketing and who also is frequently mentioned as Otellini's heir apparent. "We're not getting out of cellphones," he says. "It's a strategic thing for the company. We're on the attack, not the defensive." What Maloney has in mind for conquering cellphones is an end-around strategy. It's called WiMAX, a radio technology being developed by an Intel-led consortium of manufacturers. WiMAX aims to make possible wireless broadband communications for up to a 50-mile radius in much the same way Wi-Fi works at up to 150 feet or so. That could change the game in mobile communications by making today's cellphones obsolete.
Convincing the world that Intel's processors don't belong just in PCs is too crucial a task to entrust exclusively to the new divisions. Otellini wants Intel to regain the sex appeal it generated with its seminal "Intel Inside" campaign of the 1990s. That's why he has reached outside the company for a new head of marketing, Eric Kim. The former marketing chief at Samsung, Kim helped shape the Korean company's image as a hip purveyor of consumer electronics products. His first job at Intel will be to promote an entirely new brand for the digital home products, the particulars of which Intel isn't ready to disclose. "There'll be a master brand and several platform brands," says Kim, who emigrated from Korea to the United States 38 years ago. "'Intel Inside' explained that the microprocessor was in the PC. Centrino is the first major success behind the platform brand. The next major opportunity we see is the digital home."
While Kim's job is to communicate what Intel is to the outside world, Otellini is trying new ways to broadcast his strategy inside Intel. He has started the company's first CEO blog. Though intended strictly for internal consumption, several weeks of Otellini's blog found their way onto the web, thanks to the San Jose Mercury News, which posted his surprisingly candid comments on its website in February. In un-Intel-like fashion, Otellini heaped praise on AMD, noting that "while I hate losing share, the reality is that our competitor has a very strong product offering." He also noted the fight between traditional consumer-electronics companies and computer companies with an odd if encouraging message to the troops: "The PC is not the most natural product to win in the living room," he wrote. "But it may be the best." (See box.) Asked later how he has enjoyed being a blogger, Otellini allowed that he's still warming to the task. "It's a bit uncomfortable when you first do it," he says. "Trying to be interesting is harder than it looks."
Such humility comes naturally to Otellini, and helps make him convincingly CEO-like in an era of unassuming leaders like Wal-Mart's Lee Scott and Procter & Gamble's A.G. Lafley. Otellini even acknowledges that the prospect of becoming top dog makes him a little nervous. "You'd have to be crazy not to be," he says. "This is an awesome responsibility. You're leading one of the premier technology companies in the world and have the welfare of 80,000 families directly dependent on your decisions. Anyone who says they're not a bit intimidated or nervous is either naive or lying."
Nervous or not, he knows he has to work fast. That's a condition of employment for any CEO whose business is subject to Moore's law, and especially so at Intel. A little-noticed provision in last year's proxy statement reinforces the point: It notes that the board has stipulated that "following Dr. Barrett's tenure, the chief executive officer may continue as CEO no later than the annual stockholders' meeting at which the person is age 60."
So 54-year-old Otellini is formally limited to a six-year term, a year less than Noyce and Barrett each served, and half the terms served by Moore and Grove. Mandatory retirement rules can be waived, of course: Grove says a 60-and-out policy existed at Intel in the past and was waived for Barrett and himself. In truth, the six-year limit hardly matters. For the new boss of chips, even half that term should be enough time to prove he is right for the job.
Intel used to be organized around its chips; Otellini's new sales structure changed the focus to customers.