August 10, 2004 12:30 PM PDT

Intel colonizes with chipsets

PC chipsets are inexpensive, lack brand names and rarely get promoted to consumers, but they are the components Intel uses to colonize new markets.

Although the Santa Clara, Calif.-based chipmaker garners most of its revenue and profits from such well-known processors as the Pentium 4 or the Xeon, it's unsung heroes like the $40 915G Express chipset, released earlier this year, that have let Intel become the largest and fastest-growing graphics chip designers on the planet.

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What's new:
With powerhouse Intel folding features such as Wi-Fi connectivity directly into its chipsets, companies specializing in those fields may be in for a competitive struggle.

Bottom line:
Intel has roiled markets before--noticeably stirring up the graphics chip field for one--but Wi-Fi companies say there's plenty of room for competition. Intel's presence, they say, will pull in more customers and ultimately create more business for everyone.

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The 915 family incorporates a variety of technological enhancements, including faster memory, higher-performance graphics and audio, and the option for a built-in wireless access point. The chipset family will also give the company an opportunity to erode some of TiVo's dominance in digital video recorders and to once again become a dominant force in home Wi-Fi access points.

"There will definitely be a threat to Linksys and those companies if the desktop becomes an access point," said Kenn Furer, an analyst with IDC. "If anything, (Intel) becomes a threat because there's less need for the access point in addition to the desktop."

By making its own brand of wireless cards readily available, Intel "makes it tougher for someone like Broadcom or Atheros to be as automatic of a choice," Furer said.

Price and pervasiveness are what make Intel chipsets--a collection of chips that assist in shuttling data to and from the processor and controlling input/output--such a looming danger.

Adding graphics functionality by way of one of Intel's new chipsets tacks on only about $3 to the base price of making a PC. Standalone graphics chips can cost $15 to $30. On the wireless side, Intel's wireless bundle, which includes Wi-Fi chips along with the chipset, will cost $50, about the same as a standalone wireless router now. That price, though, can likely be cut, because the Intel bundle doesn't need a separate box--it's simply part of the computer.

Intel has about 60 percent of the chipset market. And licensees that make compatible chipsets, such as SiS and ALI, integrate similar functionality, putting further pressure on existing equipment makers.

Even before Intel came into the market, Wi-Fi manufacturers were caught in a price spiral, one that prompted Microsoft to bow out of the Wi-Fi router market in June. Still, whether Intel was the direct cause or simply the straw that broke the camel's back, its entry into many of these markets, including graphics, was followed by turmoil before a few dominant players emerged--including Intel.

The company is unapologetic. CEO Craig Barrett has said that Intel's job is to "innovate and integrate." And Sunil Kumar, director of marketing and planning for chipsets and software in Intel's desktop PC group, would seem to agree.

"We want to get every home connected," Kumar said, "and we want to facilitate that" with the built-in access point technology.

Integrate and dominate?
The morphing of Intel's chipsets is not unlike the evolution of Microsoft's Windows operating system, which has also absorbed numerous features over the years. The addition of more features has generally benefited consumers by helping PC makers cut prices on machines. Low-price desktop models, for example, use integrated graphics chipsets to eliminate the cost of a graphics card.

Microsoft, though, has seen that bundling can lead to legal problems. The software giant ran into trouble in 1997, for instance, when the U.S. Department of Justice accused it of violating a 1995 court ruling that barred it from imposing anticompetitive licensing terms on PC makers. The licensing terms for Windows 95 had required manufacturers to also license and distribute Microsoft's Internet Explorer Web browser. The case went to trial, and an eventual settlement caused Microsoft to change its licensing terms and the way it paired products.

So far, Intel has mostly avoided the same level of legal troubles. Currently, the European Union and the Japanese government are investigating the chipmaker's marketing activities, but that's the extent of the large, public investigations. An investigation by the Federal Trade Commission in the late '90s was settled before trial, although sources indicate the agency continues to monitor Intel's activity. Rival Intergraph brought an antitrust suit and won a multimillion dollar patent settlement though the antitrust claims were tossed out.

Intel offers multiple versions of its Express 915 chipset with different features and different prices, allowing PC makers and customers to choose according to their budgets. The most basic 915 Express chipset, the 915P, sells for $37, while the 915G, which includes graphics, costs $40. Among other features, the 915 enables a PC to accommodate more than one drive, lets a PC get used as a DVR and adds high-definition audio.

Preparing a PC to receive the "Wireless Connect" Wi-Fi bundle, also an option, requires that manufacturers specify a special version of the chipset's ICH6 controller chip, the ICH6W, which adds another few dollars to the chipset's price. Because it requires additional parts and compatibility testing, the Wi-Fi feature is the one that's not out yet.

"Arguably, Intel's practices reflect an assimilation of the lessons of the Microsoft case," said Mark Popofsky, a partner with the law firm Kaye Scholer in Washington, D.C. "A key teaching of Microsoft is that firms with substantial (PC) market power can avoid some legal problems by giving computer makers the freedom to decide what features to include in their machines. As long as (Intel is) giving the option not to take (Wireless Connect), then someone like Linksys can take a (different) product and potentially bundle it with a PC."

"If Intel has problems with its bundling practice, it likely has them, if at all, in Europe," Popofsky added.

Wireless is worryless
Despite the potential threat to their businesses, executives at chipmaker Atheros and Wi-Fi gear makers Linksys and NetGear insist their markets can support many companies and that Intel's efforts will ultimately benefit them all by making consumers more aware of wireless.

"Certainly (Intel) is an alternative for customers," said Patrick Lo, CEO of NetGear. Intel "will certainly get a piece of the pie: people buying a new desktop. I think the pie is big enough that even with those customers gone there are still a lot more customers we can address."

NetGear and Linksys have been diversifying their product lines by creating higher-performance standalone Wi-Fi network gear for PCs, gateways (devices that are similar to routers but add more capabilities), and wireless adapters for printers, televisions, home stereos and other devices.

"They're going to have to do something," said Steve Baker, an analyst at NPD Techworld, "because even if they keep selling access points, their client business is going to go away--every notebook is going to have a Wi-Fi adaptor preinstalled and if (Wireless Connect) happens, at a minimum it would take away a chunk of their add-in board business as well." That said, however, Baker added that "all of those guys are pretty smart. They see (products like Wireless Connect) coming, and they're going to work around it and have products that allow them to stay relevant without getting wiped out by the PC."

Though the Wi-Fi companies seem unafraid, history shows several examples of businesses that were invaded by raiders wielding chipsets.

The graphics processor market contained about 40 players in 1999, but by 2000 it had consolidated to 10 or 15, and eventually it settled to four or five companies, including Intel. Many of these companies had few customers and were suffering from financial losses even before Intel got into graphics, but the company's entry accelerated the process.

Intel's entry didn't exactly constitute a juggernaut. It first made standalone graphics chips, and it stopped selling those about a year after their debut, because of slow sales and tepid reviews.

The company, however, kept producing its chipsets with integrated graphics. Although integrated chipsets couldn't provide the same level of performance as standalone chips, consumers and PC makers flocked to them. Soon, Intel became the largest producer of graphics chips in the world.

In the first quarter of 2004, Intel garnered 33 percent of the graphics market, while Nvidia captured 27 percent and ATI had 24 percent, according to Jon Peddie Research. Intel grew its market share while Nvidia and ATI lost some.

Overall, chipsets with built-in graphics have never climbed higher than about 55 percent of the graphics market, so far. But over time, as integrated graphics gain performance, some predict that chipsets will generally gain a larger portion of the graphics market by nibbling away at the market for low-price or even midrange graphics boards.

"There's always going to be a niche section of the market where there's still going to be demand for very high-end discrete solutions," said Richard Brown, director of marketing for chipset maker VIA Technologies, an Intel competitor. But "Intel will put the squeeze on midrange and the low end. That segment of the market will continue to be gobbled up by integrated chipsets."

Companies such as ATI won't cede PCs without a fight. ATI will attempt to counter Intel by introducing a new line of chipsets for desktops and notebooks this fall that offer better built-in graphics than Intel's 915G, said Reuven Soraya, director of marketing for ATI's Integrated Business Unit.

"I don't want to minimize it, but Intel's option to bundle a CPU (computer processing unit) with a chipset has been there for a long time," Soraya said. "We compete by having higher performance at a good price point--basically a better value."

 

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