On the Impact of Paul Otellini’s CEO Years at Intel

Intel’s CEO Paul Otellini is retiring in May 2013. His 40-year career at Intel now ending, it’s a timely opportunity to look at his impact on Intel.

Intel As Otellini Took Over

In September 2004 when it was announced that Paul Otellini would take over as CEO, Intel was #46 on the Fortune 100 list, and had ramped production to 1 million Pentium 4’s a week (today over a million processors a day). The year ended with revenues of $34.2 billion. Otellini, who joined Intel with a new MBA in 1974, had 30 years of experience at Intel.

The immediate challenges the company faced fell into four areas: technology, growth, competition, and finance:

Technology: Intel processor architecture had pushed more transistors clocking faster, generating more heat. The solution was to use the benefits of Moore’s Law to put more cores on each chip and run them at controllable — and eventually much reduced — voltages.

Growth: The PC market was 80% desktops and 20% notebooks in 2004 with the North America and Europe markets already mature. Intel had chip-making plants (aka fabs) coming online that were scaled to a continuing 20%-plus volume growth rate. Intel needed new markets.

Competition: AMD was ascendant, and a growing menace.  As Otellini was taking over, a market research firm reported AMD had over 52% market share at U.S. retail, and Intel had fallen to #2. Clearly, Intel needed to win with better products.

Finance: Revenue in 2004 recovered to beat 2000, the Internet bubble peak. Margins were in the low 50% range — good but inadequate to fund both robust growth and high returns to shareholders.

Where Intel Evolved Under Paul Otellini

Addressing these challenges, Otellini changed the Intel culture, setting higher expectations, and moving in many new directions to take the company and the industry forward. Let’s look at major changes at Intel in the past eight years in the four areas: technology, growth, competition, and finance:

Technology

Design for Manufacturing: Intel’s process technology in 2004 was at 90nm. To reliably achieve a new process node and architecture every two years, Intel introduced the Tick-Tock model, where odd years deliver a new architecture and even years deliver a new, smaller process node. The engineering and manufacturing fab teams work together to design microprocessors that can be manufactured in high volume with few defects. Other key accomplishments include High-K Metal Gate transistors at 45nm, 32nm products, 3D tri-gate transistors at 22nm, and a 50% reduction in wafer production time.

Multi-core technology: The multi-core Intel PC was born in 2006 in the Core 2 Duo. Now, Intel uses Intel Architecture (IA) as a technology lever for computing across small and tiny (Atom), average (Core and Xeon), and massive (Phi) workloads. There is a deliberate continuum across computing needs, all supported by a common IA and an industry of IA-compatible software tools and applications.

Performance per Watt: Otellini led Intel’s transformational technology initiative to deliver 10X more power-efficient processors. Lower processor power requirements allow innovative form factors in tablets and notebooks and are a home run in the data center. The power-efficiency initiative comes to maturity with the launch of the fourth generation of Core processors, codename Haswell, later this quarter. Power efficiency is critical to growth in mobile, discussed below.

Growth

When Otellini took over, the company focused on the chips it made, leaving the rest of the PC business to its ecosystem partners. Recent unit growth in these mature markets comes from greater focus on a broader range of customer’s computing needs, and in bringing leading technology to market rapidly and consistently. In so doing, the company gained market share in all the PC and data center product categories.

The company shifted marketing emphasis from the mature North America and Europe to emerging geographies, notably the BRIC countries — Brazil, Russia, India, and China. That formula accounted for a significant fraction of revenue growth over the past five years.

Intel’s future growth requires developing new opportunities for microprocessors:

Mobile: The early Atom processors introduced in late 2008 were designed for low-cost netbooks and nettops, not phones and tablets. Mobile was a market where the company had to reorganize, dig in, and catch up. The energy-efficiency that benefits Haswell, the communications silicon from the 2010 Infineon acquisition, and the forthcoming 14nm process in 2014 will finally allow the company to stand toe-to-toe with competitors Qualcomm, nVidia, and Samsung using the Atom brand. Mobile is a huge growth opportunity.

Software: The company acquired Wind River Systems, a specialist in real-time software in 2009, and McAfee in 2010. These added to Intel’s own developer tools business. Software services business accelerates customer time to market with new, Intel-based products. The company stepped up efforts in consumer device software, optimizing the operating systems for Google (Android), Microsoft (Windows), and Samsung (Tizen). Why? Consumer devices sell best when an integrated hardware/software/ecosystem like Apple’s iPhone exists.

Intelligent Systems: Specialized Atom systems on a chip (SoCs) with Wind River software and Infineon mobile communications radios are increasingly being designed into medical devices, factory machines, automobiles, and new product categories such as digital signage. While the global “embedded systems” market lacks the pizzazz of mobile, it is well north of $20 billion in size.

Competition

AMD today is a considerably reduced competitive threat, and Intel has gained back #1 market share in PCs, notebooks, and data center.

Growth into the mobile markets is opening a new set of competitors which all use the ARM chip architecture. Intel’s first hero products for mobile arrive later this year, and the battle will be on.

Financial

Intel has delivered solid, improved financial results to stakeholders under Otellini. With ever more efficient fabs, the company has improved gross margins. Free cash flow supports a dividend above 4%, a $5B stock buyback program, and a multi-year capital expense program targeted at building industry-leading fabs.

The changes in financial results are summarized in the table below, showing the year before Otellini took over as CEO through the end of 2012.

GAAP 2004 2012 Change
Revenue 34.2B 53.3B 55.8%
Operating Income 10.1B 14.6B 44.6%
Net Income 7.5B 11B 46.7%
EPS $1.16 $2.13 83.6%

 

The Paul Otellini Legacy

There will be books written about Paul Otellini and his eight years at the helm of Intel. A leader should be measured by the institution he or she leaves behind. I conclude those books will describe Intel in 2013 as excelling in managed innovation, systematic growth, and shrewd risk-taking:

Managed Innovation: Intel and other tech companies always are innovative. But Intel manages innovation among the best, on a repeatable schedule and with very high quality. That’s uncommon and exceedingly difficult to do with consistency. For example, the Tick-Tock model is a business school case study: churning out ground-breaking transistor technology, processors, and high-quality leading-edge manufacturing at a predictable, steady pace of engineering to volume manufacturing. This repeatable process is Intel’s crown jewel, and is a national asset.

Systematic Growth: Under Otellini, Intel made multi-billion dollar investments in each of the mobile, software, and intelligent systems markets. Most of the payback growth will come in the future, and will be worth tens of billions in ROI.

The company looks at the Total Addressable Market (TAM) for digital processors, decides what segments are most profitable now and in the near future, and develops capacity and go-to-market plans to capture top-three market share. TAM models are very common in the tech industry. But Intel is the only company constantly looking at the entire global TAM for processors and related silicon. With an IA computing continuum of products in place, plans to achieve more growth in all segments are realistic.

Shrewd Risk-Taking: The company is investing $35 billion in capital expenses for new chip-making plants and equipment, creating manufacturing flexibility, foundry opportunities, and demonstrating a commitment to keep at the forefront of chip-making technology. By winning the battle for cheaper and faster transistors, Intel ensures itself a large share of a growing pie while keeping competitors playing catch-up.

History and not analysts will grade the legacy of Paul Otellini as CEO at Intel. I am comfortable in predicting he will be well regarded.

Gaming AMD’s 2012 Strategy

AMD intends to pursue “growth opportunities” in low-powered devices, emerging markets and Internet-based businesses.

There’s an awful lot of mis-guided analysis wafting about regarding AMD’s new strategic direction, which the company says it will make public in February. This piece is to help you (and me) sort through the facts and the opportunities. I last took a look at AMD’s strategies earlier this year, available here.

Starting With the Facts

  • AMD is a fabless semiconductor company since 2009. The company depends on GlobalFoundries and soon Taiwan Semiconductor to actually fabricate its chips;
  • In its latest quarter, AMD had net income of about $100 million on $1.7 billion in revenue. Subsequently, the company announced a restructuring that seeks to cut costs by $118 million in 2012, largely through a reduction in force of about ten percent;
  • AMD has about a 20% market share in the PC market, which Intel says is growing north of 20% this year, largely in emerging markets;
  • AMD’s products compete most successfully against rival Intel in the low- to mid-range PC categories, but 2011 PC processors have underwhelmed reviewers, especially in performance as compared to comparable Intel products;
  • AMD has less than a 10% market share in the server market of about 250,000 units, which grew 7.6% last quarter according to Gartner Group;
  • AMD’s graphics division competes with nVidia in the discrete graphics chip business, which is growing in profitable commercial applications like high-performance supercomputing and declining in the core PC business as Intel’s integrated graphics is now “good enough” for mainstream buyers;
  • AMD has no significant expertise in phone and tablet chip design, especially the multi-function “systems on a chip (SOCs)” that make up all of today’s hot sellers.

What Will AMD CEO Rory Read’s Strategy Be?

I have no insider information and no crystal ball. But my eyebrows were seriously raised this morning in perplexity to see several headlines such as “AMD to give up competing with Intel on X86“, which led to “AMD struggling to reinvent itself” in the hometown Mercury News. I will stipulate that AMD is indeed struggling to reinvent itself, as the public process has taken most of 2011. The board of directors itself seems unclear on direction. That said, here is my score card on reinvention opportunities in descending order of attractiveness:

  1. Servers —  For not much more work than a desktop high-end Bulldozer microprocessor, AMD makes Opteron 6100 server processors. Hundreds or thousands more revenue dollars per chip at correspondingly higher margins. AMD has a tiny market share, but keeps a foot in the door at the major server OEMs. The company has been late and underdelivered to its OEMs recently. But the problem is execution, not computer science.
  2. Desktop and Notebook PCs — AMD is in this market and the volumes are huge. AMD needs volume to amortize its R&D and fab preparation costs for each generation of products. Twenty percent of a 400 million chip 2011 market is 80 million units! While faster, more competitive chips would help gain market share from Intel, AMD has to execute profitably in the PC space to survive. I see no role for AMD that does not include PCs — unless we are talking about a much smaller, specialized AMD.
  3. Graphics Processors (GPUs) — ATI products are neck-and-neck with nVidia in the discrete graphics card space. But nVidia has done a great job of late creating a high-performance computing market that consumes tens of thousands of commercial-grade (e.g., high price) graphics cards. Intel is about to jump into the HPC space with Knight’s Corner, a many-X86-core chip. Meanwhile, AMD needs the graphics talent onboard to drive innovation in its Fusion processors that marry a processor and graphics on one chip. So, I don’t see an AMD without a graphics component, but neither do I see huge profit pools either.
  4. Getting Out of the X86 Business — If you’re reading along and thinking you might short AMD stock, this is the reason not to: the only legally sanctioned software-compatible competition to X86 inventor Intel. If AMD decides to get out of making X86 chips, it better have a sound strategy in mind and the ability to execute. But be assured that the investment bankers and hedge funds would be flailing elbows to buy the piece of AMD that allows them to mint, er, process X86 chips. So, I describe this option as “sell off the family jewels”, and am not enthralled with the prospects for success in using those funds to generate $6.8 billion in profitable revenue or better to replace today’s X86 business.
  5. Entering the ARM Smartphone and Tablet Market— A sure path to Chapter 11. Remember, AMD no longer makes the chips it designs, so it lacks any fab margin to use elsewhere in the business. It starts against well-experienced ARM processor designers including Apple, Qualcomm, Samsung, and TI … and even nVidia. Most ARM licensees take an off-the-shelf design from ARM that is tweaked and married to input-output to create an SOC design, that then competes for space at one of the handful of global fab companies. AMD has absolutely no special sauce to win in the ARM SOC kitchen.To win, AMD would have to execute flawlessly in its maiden start (see execution problems above), gain credibility, nail down 100+ design wins for its second generation, and outrace the largest and most experienced companies in the digital consumer products arena. Oh, and don’t forget volume, profitability, and especially cash flow. It can’t be done. Or if it can be done, the risks are at heart-attack levels.

“AMD intends to pursue “growth opportunities” in low-powered devices, emerging markets and Internet-based businesses.” One way to read that ambiguous sentence by AMD is a strategy that includes:

  • Tablets and netbooks running X86 Windows 8;
  • Emerging geographic markets, chasing Intel for the next billion Internet users in places like Brazil, China, and even Africa. Here, AMD’s traditional value play resonates;
  • Internet-based businesses such as lots of profitable servers in the cloud. Tier 4 datacenters for Amazon, Apple, Facebook, Google, and Microsoft are a small but off-the-charts growing market.

So, let’s get together in February and see how the strategy chips fall. Or post a comment on your game plan for AMD.

H-P’s Apotheker: We Want to Split H-P Into Two Companies

H-P CEO Leo Apotheker has a very different set of talking points this week than he did last week in a hastily called teleconference after a trading halt which announced the halt to WebOS investments and the spinoff of the $38 billion Personal Systems Division (PSD). Analysts and Wall Street immediately started picking likely buyers of H-P’s PC product line.

But Monday’s interview with the Wall Street Journal tells a different story with a decidedly different outcome for shareholders. Quoting Apotheker:

What we’re really doing is creating two companies: One focused on the enterprise, and one which will be a highly-effective, end-user device business. It will be much more than PCs.

These businesses are ticking at different speeds, need to have different structures, and make different investment decisions. The device business [is] a fast moving consumer business. If you want to compete in this business you have to be much faster than a conglomerate can move in most circumstances.

The other side of H-P, the enterprise side, that’s where we acquired Autonomy. We have some great ideas for how we can scale that business.

Our default option is to see if we can spin this business off to our shareholders. That’s not the only option that we’re looking at. The board and management have been working on this for quite some time. If we really want to take the necessary steps, you have to involve a lot of people and once you inform a lot of people you need to inform the market.

We said it would take anywhere from 12 to 18 months to complete the spin, and it’s obvious that the decision will happen much sooner. The board will want to make the best decision for shareholders and our current hypothesis is that is by spinning the business to shareholders.

This different story — or Friday’s story told better — is a lot less suicidal than throwing PSD off the bus to the highest rapacious bidder. Motorola did this last year, spinning the personal devices company off from radios and public sector. So there certainly is precedent.

But what do we make of “one which will be a highly-effective, end-user device business. It will be much more than PCs?” My reading is everything consumer including phones, PCs, and printers. If Leo really wants to focus on medium and large enterprises, he’ll throw in transactional servers, storage, and maybe even the entire small-medium business (SMB) organization.

If the spinoff to shareholders looks like my sketch above, it’s not a bad strategy. Makes H-P kinda look like Samsung, which makes smartphones and oil tankers through highly decentralized business units.

Here are the concerns H-P shareholders face in considering a deal, once announced:

  • It’s all about execution. Slamming together PCs and printers does not ensure success. And even enterprise company sales reps sell PCs, or used to. The devil is in the details.
  • The independent, entrepreneurial culture does not exist at H-P. Where does the PC Newco innovation DNA come from?
  • By over-spending in a $10 billion bid for Autonomy, H-P has only $3 billion in cash. Where does PC Newco get the billions it will need for R&D and cash flow? Underfunded, the effort will quickly disintegrate.
  • Did the premature and botched announcement of the spinoff last Friday freeze PSD staffers like deer in headlights? Will the human capital disappear before PC Newco really gets started? Didn’t $5 billion in Palm WebOS investment get vaporized?
  • Can any big PC company — with the glaring exception of Apple — do much better than 6% margins in a fast-churn product rat race?
  • How will consumers react to PC Newco branding (let alone products)? When IBM spun off PCs to Lenovo, the valued ThinkPad brand went to Lenovo. take away the H-P name and logo, and the products won’t sell as readily. And Pavilion as a brand does not come close to the value of ThinkPad.

We’ll leave how the rest of the PC ecosystem might react to the PC spinoff to another day.

via H-P CEO Apotheker Defends Strategy – WSJ.com.

 

BAPco SYSmark 2012: Dropping the Llano Shoe

No wonder AMD was upset enough over BAPco’s SYSmark 2012 benchmark to drop out of the non-profit benchmarking organization in June with much sturm und drang.

My testing of the AMD Fusion high-end “Llano” processor, the A8-3850 APU, shows an overall rating on SYSmark 2012 of 91. Except for the 3D component of the benchmark, the Intel “Sandy Bridge” Pentium 840 scores higher in individual components — and higher overall — with a score of 98, according to the official SYSmark 2012 web site.

The SYSmark 2012 reference platform scores 100. That puts the high-end Llano desktop performance at 90% of a 2010 Intel “Clarkdale” first-generation Core i3-540, a low-end mainstream processor.

Moreover, the Intel “Sandy Bridge” Core i3-2120 dual-core processor with integrated graphics costs within a dollar of the “Llano” A8-3850 but delivers a 36 point higher score – noticeably snappier performance, in my actual use experience (see chart below).

I also tested AMD’s Phenom II 1100T, a top-end AMD six-core processor with an ATI Radeon HD 4290 graphics card, against an Intel “Sandy Bridge” second generation Core i5-2500 with integrated graphics. The Core i5-2500 is the superior processor on this benchmark; the much-maligned Intel internal graphics barely loses to the ATI 4920 external graphics card in the 3D component, while delivering a 44 point overall advantage. The results are shown below in Chart 1.

Chart 1: Selected BAPco SYSmark 2012 Scores

Processor Overall Office Media Analysis 3D Web Sys Mgt
Intel i5-2500 166 144 162 191 181 168 153
Intel i3-2120 127 123 125 146 125 121 122
AMD Phenom II 1100T 122 109 116 122 183 108 110
Intel Pentium 840 98 100 102 106 87 90 107
AMD A8-3850 91 91 84 96 121 73 88
Intel Pentium G620T 79 81 81 88 70 71 86

Source: Peter S. Kastner andBusiness Applications Performance Corporation

Is SYSmark 2012 Relevant?
SYSmark 2012 is relevant because it allows evaluators to test specific PC configurations against actual, commonly used business applications.

AMD says “AMD will only endorse benchmarks based on real-world computing models and software applications, and which provide useful and relevant information. AMD believes benchmarks should be constructed to provide unbiased results and be transparent to customers making decisions based on those results.” Let’s look at what SYSmark does and how it does it.

Serious readers will study the SYSmark 2012 Overview published at the BAPco web site. This benchmark version is built on 20 years of collaborative experience by BAPco in modeling business work loads into application scenarios and corresponding benchmarks through a 26-phase process that takes years to complete. The last version was SYSmark2007 under Windows Vista. SYSmark is real-world in that it incorporates widely used applications such as Office, AutoCAD, Acrobat, Flash, Photoshop and Internet Explorer under Windows 7 in component scenarios.

SYSmark is widely used around the globe in business and public tenders to select PCs without bias towards vendor and processor manufacturer. SYSmark is the only generally accepted benchmark for general business computers since it uses actual application code in the tests, not synthetic models.

The benchmark is intensive, reflecting workload snapshots of what power users actually do, rather than light-duty office workers. There are six scenario components to SYSmark 2012, each of which counts equally in the final rating:

Office Productivity: The Office Productivity scenario models productivity usage including word processing, spreadsheet data manipulation, email creation/management and web browsing.

Media Creation: The Media Creation scenario models using digital photos and digital video to create, preview, and render a video advertisement for a fictional business.

Web Development: The Web Development scenario models the creation of a website for a fictional company.

Data/Financial Analysis: The Data/Financial Analysis scenario creates financial models to review, evaluate and forecast business expenses. In addition, the performance and viability of financial investments is analyzed using past and projected performance data.

3D Modeling: The 3D Modeling scenario focuses on creating, rendering, and previewing 3D objects and/or environments suitable for use in still imagery. The creation of 3D architectural models/landscapes and rendering of 2D images and video of models are also included.

System Management: The System Management scenario models the creation of data backup sets and the compression, and decompression of various file types. Updates to installed software are also performed.

For each of the six components, BAPco develops a workflow scenario. Only then are applications chosen to do the work. BAPco licenses the actual application source code and assembles it into application fragments together with its workflow measurement framework. The data/financial analysis component, for example, runs a large Microsoft Excel spreadsheet model.

What I don’t like is the “2012” moniker. This SYSmark version is built on business application components as of 2010. By naming it SYSmark 2012, BAPco implies the benchmark is forward looking, when it actually looks back to 2010 application versions. The labeling should be 2010. In spite of the labeling, SYSmark 2012 is unique as a cross-platform benchmark for stressing business desktops using real-world applications in job-related scenarios.

Analysis and Conclusions
The SYSmark 2012 reference-point PC is a Core i3-540 and has a 100 point score. When I used this processor with Windows 7 last year as my “daily-driver PC” for a month, I was underwhelmed by its overall feel. Subjective comment, yes, but my point is that the reference machine is no speed demon.

The new AMD “Llano” A8-3850, a quad-core processor with integrated graphics, is adequate for light-weight office duties as measured by BAPco SYSmark 2012. The top-of-the-line AMD Phenom II 1100T with a discrete graphics card is better suited for mainstream task-specific business computing than the “Llano” processors.

Intel’s low-end dual-core “Sandy Bridge” Pentium 620 and 840 bracket the “Llano” A8-3850 in processor performance, while lagging in graphics-intensive 3D benchmark components.

Intel’s entry-level Core i3-2120 with integrated graphics handily beats the top-of-the-line Phenom II 1100T with a discrete graphics card in all but graphics-intensive 3D benchmarks, making it an attractive price-performer. The high-end Core i5-2500 tops the top-of-the line Phenom II 1100T with a 44 point overall advantage, despite using integrated graphics.

SYSmark’s results do not plow new performance ground. An Internet search will quickly turn up numerous reviews that conclude, using a different set of benchmarks, that the “Llano” line is weak as a processing engine and pretty good at graphics, especially 3D consumer games. Yet consumer games are not typically not high on the business PC evaluation checklist.

Many of the SYSmark 2012 applications use graphics-processor acceleration, when available, including Adobe Photoshop, Flash, Premier Pro CS5, Autodesk 3ds Max and AutoCAD, and Microsoft Excel. SYSmark 2012 convinces me that today’s integrated graphics are plenty good enough for business PCs shy of dedicated workstations. But a strong processor is still necessary for good overall performance.

Business desktops ought to be replaced every three to four years. However, the reality is many businesses keep desktops for five or more years, and many have instituted a “replace it when it breaks” cycle. Productivity studies show that knowledge workers deserve the higher end of today’s performance curve in a new PC so as not to be completely obsolete — and less productive — before the machine is replaced.

No single benchmark should be the sole criteria for selecting a computer, and SYSmark 2012 is no exception. However, I disagree with AMD that SYSmark is no longer worthy of consideration, and by other analysts that SYSmark is dead because AMD walked away from BAPco.

The bottom line for PC evaluators is simple: if you believe that the extensive work by the BAPco consortium across two decades stands up to scientific and peer scrutiny, then the SYSmark results discussed above show AMD at a serious performance disadvantage. If you don’t think SYSmark is a relevant benchmark for business PCs, then neither AMD nor I have a viable substitute.

The next shoe to drop is AMD’s high-end “Bulldozer” processor, expected in the next 60 days.