Intel needs new markets, not new chips
The company needs to reinvent itself as IBM did under Lou Gerstner.
Just as Wall Street has focused over the last decade on Too Big To Fail (TBTF) banks, Silicon Valley has faced its own crisis -- what I call the Too Big To Succeed (TBTS) companies.
Intel (INTC) is a classic example of the phenomenon. The company has become so focused on its "product roadmap," and on the internal signals coming from that roadmap, that it wound up ignoring the changes in the market beyond for over a decade.
In the shift from PCs to clouds and devices, which has been underway now for a decade, circuit count, Gigaflops, and compatibility mean less than what the finished product does.
A decade ago original equipment manufacturers were telling Intel that they needed finished designs and customers, not hardware and "software ecosystems." But Intel didn't listen. It didn't have to, because the PC business kept growing and Intel ruled it.
Those days are over. The stock fell hard on its fourth-quarter results, and is now at barely one-fourth the level it stood at in 2000, the time of its last stock split.
The problem for Intel isn't just on the sales floor. Clouds don't need high-powered hardware, they need the lowest possible price, and buyers there don't care if your hardware is optimized for a particular operating system -- hypervisors take care of that. That, and not the consumer end of the PC market, is the real problem for Intel. There is no longer a premium on the high end.
CEO Paul Otellini seems to have recognized this, which is why he decided to retire "early," at age 62, rather than at Intel's mandatory 65. Otellini has suggested that Intel will look for a successor inside the company, and this could prove fatal.
Yes, I wrote fatal. Intel's moat has been breached on both sides -- consumer and business. The company is taking on water quickly, having already set out a new capital spending "road map" built on the idea that better chips are the answer to its problem.
Better chips are not the answer. New markets are the answer. Intel needs to discover big, new markets. It needs to look at itself from the outside, not the inside, and either figure out what people need before they need it, or go whole-hog into the third-party foundry business. Probably both find new markets and focus on the foundry business.
Find a Gerstner
Lou Gerstner, the now-legendary IBM (IBM) chairman, came to the company from RJR Nabisco, the cookie company. He found a way to re-invent IBM around services, around the results computers can produce rather than computers themselves. He was ruthless in this reinvention, laying off thousands, and while IBM trailed its peers during the Internet decade, it has since become their quiet leader.
The reinvention of IBM has been continued under successors Sam Palmisano and Virginia Rometty. You no longer read about the company much in the technology press, and that's deliberate. The company has become far more oriented around software, most recently open-source cloud software, and has been using these tools to build out its own cloud capacity.
I write a lot about cloud, about companies like Google and Amazon that sell cloud capacity. But IBM does much more. It sells secure systems and it sells entire clouds, all around the world. It's already where its louder rivals are headed. This means it can keep delivering steady gains year-after-year, writing down used assets, buying more, and investing in leading-edge technologies that mainly tell customers their technology partner is not asleep at the wheel.
Gerstner retired from IBM in 2002, and the Carlyle Group in 2008, but there are other Lou Gerstners around in the business world, there always are. (Full disclosure. I have held IBM shares since the middle of the last decade. They have done very, very well for me.) If Intel can't find a talented business executive from the outside, if it does indeed hire an insider again, I'd not only be selling my few remaining shares, but selling the company short.
What might a reinvented Intel look like?
I think that, like IBM, it would be more customer-focused. Its interests in foundries and new designs would be set on one side of the ledger, and its interests in creating the next-generation of devices and cloud server racks would be put on the other. It would be more sales oriented, and more of its salesmen would have designers on staff who would work directly with colleagues in Taiwan, China and Japan. And instead of just selling Intel Inside, the company would also be selling some of its own designs -- there would be Intel Outside.
So do yourself a favor. Don't listen to the fools who are pounding the table for Intel right now, claiming that its "road map" shows promise or its capital is deployed efficiently. I listened to them for the last decade, I only got out of part of my position last year, and I have paid a price for that. If you can't pull demand out of the back-end, it doesn't matter how good your factory is.
If Intel won't look at itself from the outside, and focus on building new markets for its products based on the market realities of 2013, it will be bringing itself nowhere but down. And you don't want to be part of that.
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