Inside Intel. Tim Jackson

half its earnings during the last quarter of 1994, when the board meeting took its decision – and turned one million of the world’s most advanced microprocessors into nothing more than ornamental tie-pins and key chains.

      Once Intel had backed down, the bad publicity went away almost instantly. Within weeks, public confidence in the corrected Pentium chip began to return. Within months, the two class-action lawsuits that had been filed against the company as a result of the Pentium flaw began to move to settlement. And Intel, scarred and chastened by the experience, began to return to the business it knew best: building microprocessors for personal computers.

      Today, three years later, the incident has been forgotten by most people other than specialists in the microprocessor industry. Intel’s brand is stronger than ever, and its share price has nearly quadrupled since that telephone board meeting. In retrospect, the Pentium incident now looks like an aberration, a buying opportunity, a hiccup in the otherwise irresistible rise of one of America’s most powerful and successful companies.

      But was it an aberration? Or did the Pentium scandal reveal something important about Andy Grove and the company that he ran?

      Intel Corporation, founded in 1968, can claim credit for inventing some of the most important technologies of the modern electronics industry and bringing them successfully to the mass market. Towering among its achievements is the invention of the microprocessor, which has brought the power of computing to the desks of hundreds of millions of people all over the world, and has changed the world around us by putting intelligence into appliances ranging from vacuum cleaners to cell phones and from toys to cars.

      The conditions that gave rise to this extraordinary spike of scientific innovation were put in place by two men, Robert Noyce and Gordon Moore. Both of them were leading figures in California’s electronics industry, long before the San Francisco Bay Area even became known as Silicon Valley. It was their charisma, their leadership, their contacts and their reputation that brought together a group of the most talented engineers in the world and established the framework that allowed scientific creativity to flow.

      But it was only for a short time that innovation was the most significant thing that Intel did. When it released the world’s first microprocessor to the market, Intel was just two years old, and had been a public company for only one month. It did not yet stand out far from the crowd of other startup companies trying to make money from the uncertain new technology of integrated electronics.

      So Intel changed. From being just an innovator, it became a company whose objective was to deliver – to make sure its good ideas were turned into practical products that customers could use, products that arrived on schedule and at prices that fell consistently year by year. This transformation was no mean feat. It forced Intel to become rigorously organized and focused, and to find a balance that allowed it to keep firm control over its operations without jeopardizing the creativity of the scientists who were its greatest commercial asset.

      The result of this transformation was that Intel rose to domination of its industry. Its memory chips, the products that generated most of its sales, swept the mainframe computer industry by storm, and its microprocessors became the standard on which the entirely new industry of the personal computer was built. It wasn’t the intrinsic merits of Intel’s products that brought about this domination. Instead, it was more apparently banal things like distribution, customer support, product range, documentation, and technical development tools.

      The process was by no means smooth. Nearly nine years after Intel created the microprocessor, the company found itself running last in a three-way race for market share. Yet the company refused to give up. In a matter of days it created a campaign to convince its employees that regaining leadership of the microprocessor industry, and crushing its leading competitor, was a matter of survival. The campaign, called Operation Crush, worked like a dream. Intel’s microprocessor, acknowledged even by its own engineers as technically inferior to the competition, had become the industry standard. Almost by accident, a later version of it was chosen by IBM as the basis for the IBM Personal Computer.

      As the PC began to change the face of the computer industry in the 1980s, Intel once again went through a transformation. Now that it was the industry leader, the company no longer needed to focus on delivering ground-breaking new products or using marketing campaigns to overthrow a more powerful rival. Instead, the key to its continued success was to keep challengers at bay and to attack any threat to its high profit margins. So Intel planned and carried out a ruthlessly brilliant programme to change the rules of the chip industry. Instead of authorizing other companies to base their products on its designs – a practice, known as ‘second sourcing’, that was accepted as the only way to give customers security of supply – Intel resolved secretly that it would become the monopoly supplier of its chip designs. To achieve this goal the company had to flout a long-term technology agreement with a key partner. But the stakes were too high for this to be an obstacle.

      So lucrative was Intel’s monopoly, though, that the company began to face the problem that plagues all successful technology companies: how to stop others from setting up new companies that threatened its position. Here Intel responded in a style that would have earned the respect of any general on the battlefield. It launched a string of long-running lawsuits – civil and criminal, state and federal – against competing chip design teams, former employees, semiconductor manufacturing plants, venture capitalists and at one stage nearly even going to war with the computer companies that were its own customers. Intel’s legal department spent hundreds of millions of dollars, and the general counsel who headed it was at one point told that one of the targets he would have to meet in order to get a good performance appraisal was a fixed number of new lawsuits to start each quarter. The strategy of suing everyone in sight wasn’t likely to win many friends, and Intel lost or settled more cases than it won. But the policy of filing writs first and asking questions later helped Intel to hold on to its monopoly profits for longer.

      The other focus of this ‘exclusion’ phase of Intel’s history was branding. After years of giving its products only part numbers instead of names, the company realized at the end of the 1980s that the ultimate way to keep competitors out was to make consumers associate the Intel name with high quality and reliability. So the company ran a succession of programmes encouraging PC buyers to concentrate on the processor inside, not the name on the box. First came the ‘Red X’ campaign, in which a big red X was spray-painted over the name of an outdated Intel chip that the company wanted to supersede. Then came ‘Intel Inside’, in which the company subsidized the cost of PC manufacturers’ advertisements if they included the right slogan and logo in their copy. Finally, in a move that made it dramatically harder for competitors to attract the attention of customers, the company switched from numbering its processors to giving them names.

      Brilliantly successful at excluding competitors though it was, this campaign had a side-effect. It infuriated many of the most powerful players in the PC industry. They saw Intel’s promotion of its brand as a direct threat to their own, and a move that would tilt the balance of power against them in favour of low-cost, no-name companies that would now have the credibility of Intel’s backing. In one startling moment, the CEO of Compaq Computer went public with a withering attack on Intel’s strategy.

      Though the issue continues to rumble on, it has to some extent been overtaken by events. Intel’s domination of the microprocessor industry is now so complete that the company has little to gain from making life harder for rivals building processors that conform to the Intel instruction set, or chip makers promoting entirely different standards. In the late 1990s Intel is in the position of a gardener who has marked out a plot and removed all the weeds. Its job now is cultivation. In this fourth and latest phase of the company’s history, the objectives are to make sure that every time a consumer walks out of a store with a PC in a cardboard box, more of the total selling price of that machine falls straight to Intel’s bottom line; to persuade consumers to replace their PCs more often – or as a second best to keep their old machines, but upgrade the Intel processors inside them; and to make the PC as a whole a more attractive product, so that people choosing between buying a new TV and a new computer will make the choice that brings in profits for Intel.

      This new ‘cultivation’ phase puts Intel in the position of being less a