Q&A With Intel CEO Otellini: All About the Chip

With an onsite gallery devoted to the history of the microchip and see-through furniture filled with old chips, Intel’s (INTC) Santa Clara, Calif., headquarters treats computing progress with reverence. Actual computers, on the other hand? Slightly less precious. The chipmaker’s 80,000 employees are granted a company-issued laptop—and at least one breaks every day, to the tune of some 500 busted notebooks every year.

Even with bargain-basement laptops and a bulk discount, that would add up to $250,000 a year—enough to drive some CEOs crazy. But Paul Otellini finds it reassuring. After all, if Intel’s employees need replacements regularly, so too must the millions of consumers who drive demand for computers—which drives demand for Intel’s processors, the chips that power more than three-quarters of computers on the market.

Otellini, who rose through Intel’s sales and marketing ranks to take the top job in 2005, is counting on that resilience to propel Intel through the weak economy. So far, it seems reasonable: Profit took a big hit in the fourth quarter of 2008 but rebounded significantly through the first half of 2009. Also, second-quarter sales were up 13 percent from the first quarter, though still down from a year ago. The company says it’s expecting its typical second-half bump from back-to-school and holiday shopping. So far, the market seems optimistic: After hitting $12 this spring, shares are trading close to $20.

But in the long run, computers alone won’t do it for Intel. Computer sales are growing at about 10 percent per year, says Patrick Wang, an analyst at Wedbush Morgan, but prices are falling, and revenue-wise, that’s a losing proposition for a company used to double-digit growth. To really grow, Intel will have to tap the market for smaller, more portable devices, like smartphones and health care technology, which means learning to build chips that are even tinier, lighter, and more efficient and reliable. But as of now, that market has an Intel of its own, a little-known company called ARM Holdings that has designed the chips in 90 percent of cell phones on the market. Otellini says it’s only a matter of time before Intel is in the mix too, noting that the company plans to invest $7 billion in its domestic factories to foster this kind of innovation. We traveled to Santa Clara to ask Otellini how much more computing power we really need, why domestic manufacturing isn’t dead, and what he’d like out of technology that even he can’t get.

SmartMoney: The conventional wisdom suggests people would have stopped buying computers in a weak economy, but your sales haven’t dipped too badly.

Paul Otellini: This is the first down cycle since the PC has become indispensable. Even in the dot-com bust, it wasn’t pervasive. If your PC broke tonight, you wouldn’t wait until the end of the recession to replace it. To me, that’s a valid test of the utility and the indispensability. So that gives us a bit more confidence.

Historically, people didn’t buy a new computer because their old one broke. They bought a new one because the old one became obsolete—and that doesn’t happen as quickly anymore.

That’s true—it’s new utilities and new uses that drive demand, and I don’t see that changing. But there are more than 500 million PCs that are more than three years old now. Fine. Windows 7 comes out next year. Are they going to run Windows 7? Probably not. If people want Windows 7—which is stunning, by the way—they’re going to need a new PC.

But for most people, their current computer might be enough.

I’ve had generations of journalists sit in this room and tell me, “Why do I need anything more than what I have?” In 1985 people said, “I’ll never need anything more than a 386.” If you think that computing is going to stay the same for the rest of your life, then you can keep the computer you have. But at the end of the day, we want computing to be like Star Trek, right? So it just does stuff for us without having to deal with it. And to do that takes more performance, not less.

And now you’re working on chips for smartphones and medical devices?

We’ve had to develop the smallest, cheapest part with good performance we could. We’ve never done that before, but we have to get into these things that don’t have the budget a PC does. The architecture is merging.

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