Core Issues

In an exclusive interview with CRN a week before this year's annual Intel Solution Summit, President, COO and CEO-in-waiting Paul Otellini said, "The problems that happened in early '04 had root causes in '02 and '03. The systems you're seeing now are a function of the discipline we reinstilled in the company after we saw some slips."

After a series of ill-timed product delays last year, Otellini and CEO Craig Barrett raised hell, in effect telling executives throughout the company not to write checks Intel couldn't cash. "Everything I said then—return to 90 percent confident schedules, making sure we're staffing these [projects] appropriately, trim the road map to make sure we have a very clear vision on delivering everything in the platform together—it's where we've been during 98 percent of our history."

Otellini said he's confident Intel has successfully addressed its problems and that the channel will reap the benefits. His confidence appears to be well-founded. Based on early feedback from solution providers and system builders, Intel executives can expect to get generally good grades from the channel but may get a few "incompletes" from system builders when they meet at the Las Vegas summit.

"We still do have challenges," said David Su, president of Jetta International, a Monmouth, N.J.-based system builder and solution provider. Specifically, Su pointed to the continued pressure over pricing disparities between large OEMs and system builders, preserving healthy hardware margins and convincing customers that new Intel technology such as dual-core processors are necessary and worth the premium.

But that's exactly where Santa Clara, Calif.-based Intel says its strategy will become valuable to the channel. In addition to rolling out a series of higher-end CPUs this year—including dual-core chips within several weeks and more 64-bit-enabled processors—the company is intent on custom-tailoring a product line specifically for smaller channel companies. Intel executives hope to make it clear this week that they are serious about giving the channel a big boost.

Here's what they can be expected to say:

The new Channel Products Group, which Intel created in January as part of a complete corporate restructuring, will use its leverage with other company groups to ensure all platforms and products—from Itanium to flash memory—are channel-friendly and provide opportunity to add value. Sources say Intel could unveil several channel-only products in the near term.

Other Intel business units created in January, including the Digital Home Group, the Mobile Products Group and the Digital Health Group, have been instructed to work in lockstep with the Channel Products Group in the development and production of systems and solutions for the channel.

Intel, which saw sales of its x86-based, 64-bit solutions overtake Advanced Micro Devices within six months of launching its EMT64 systems last year, will continue to press for channel adoption of the technology, with Microsoft poised to begin shipping a new 64-bit operating system within weeks.

System builders in North America will see some simplification of the "Intel Inside" program for the channel, with attempts to draw more solution providers and system builders into the marketing effort. Intel will begin running regional advertisements and adding solution provider names to them as one piece of the effort.

Otellini, who is slated to become CEO in May upon Barrett's ascension to chairman, pushed for the creation of the Channel Products Group as a key enabler for solution providers.

"I think this is an indication of how serious we treat this thing, particularly [the channel's] own needs," Otellini told CRN. "Up until now, the channel products have been principally repackaged versions of products: motherboards spun a little bit differently, or different SKUs on processors. Now this reflects that we'll actually start doing design activities for the channel, particularly in globalized markets."

The Channel Products Group was turned over to Bill Siu, an Intel vice president whose previous post had been as general manager of the Desktop Products Group. Among other things, Siu led what Intel considers the successful creation of an "iCafe" prototype PC—a small-form-factor, highly manageable desktop used in China's ubiquitous Internet cafs. Otellini and Siu have said they think a model of replicating channel- and geography-specific Intel products will pay off. Otellini said he expects it to be successful "especially in the North American channel."

Jack Boyczuk, president of Great Lakes Electronics Distributing, a Buffalo, N.Y., system builder and a member of Intel's channel advisory board, suggested the seeds for the Channel Products Group were planted once the company began to actively listen to solution providers and system builders.

"In October 2002, when they formed the board of advisors, they started to get direct feedback from people who were representing their channel," Boyczuk said. "They said, 'Hey, we can design products specifically for these guys and give them a great advantage in their market.' "

At the same time, Intel's channel architects willingly admit that this is enlightened self-interest. In recent years, they have been quick to point out to analysts and investors that channel players have been among the earliest adopters of its newest technologies, especially the Centrino mobile platform and 64-bit extended memory systems for servers. In those cases, smaller system builders led the technology transitions. 2005 will mark perhaps Intel's most aggressive year ever in technology transition, as it plans to roll out processors with two cores into a market hungry for greater performance.

"For us to be successful, we need the channel to transition and bring these products to market," said Steve Dallman, Intel's director of Americas distribution and channel marketing. "That's the critical time—that quarter, or three- to six-month time period—when the new technologies come out. The huge advantage that you have with a strong channel, which we've been able to put together, is they can go into a small business or a medium business or to an individual consumer and explain what this technology is and what benefits it brings to them."

What makes the next three- to six-month span even more critical is Intel's desire to put an at-times embarrassing 2004 behind it. Last year, Intel was forced to cancel a series of products, including its LCOS processor for LCDs and its 4GHz Pentium 4, and delay several others in a series of missteps and market misreads. In September, the company ripped up its product road map and said it would focus less on Gigahertz and more on "platformization"—the bundling of platform-level components into integrated products and systems. It also placed a heavy emphasis on its transition from single-core to dual-core processors. The company now says its first dual-core desktop processors will ship within several weeks and, within a year, it will have dual-core chips throughout its product line.

Otellini acknowledged last year that Intel had dropped the ball, but behind the scenes he rode herd on employees to turn things around quickly. And, he said, he has a simple explanation for why he projected a tone of confidence in the new road map and focus on dual-core chips and platformization. "I had the internal schedules," Otellini said.

Adding to the urgency was heightened competition from AMD, Sunnyvale, Calif., which is set to ship its own dual-core chips midyear and which saw significant adoption of its 64-bit Opteron processor for servers last year. Since then, however, Intel has kept its road map promises and its 2004 fourth quarter was a record for sales and profit. Meanwhile, AMD reported disappointing fourth-quarter earnings last year—beset by trouble in its flash memory business—and has said publicly that it expects chip sales in the first quarter of 2005 will be flat to slightly below its most recent quarter. Talk by system builders of AMD capitalizing on Intel's shortcomings has since subsided considerably.

Intel's shift to an aggressive dual-core processor strategy is being welcomed by system builders, including some who believe it's high time.

David Barker, president of Electrosonics, a Fraser, Mich.-based system builder and Intel partner, said the timing of the new technology rollout is especially important.

"They're not moving fast enough," Barker said. "I wish they had dual-core out last fall, personally. Customers do want dual-core, dual-core with Hyper-Threading. We've kind of topped out on the high-end processor speed. We're not seeing the gains we used to see."

Earlier this month at the Intel Developer Forum in San Francisco, the company demonstrated a series of the new technologies it will integrate with dual-core processors, including its Virtualization technology, Active Management technology and 64-bit-enabled desktops. Intel is banking on the breadth of new functions and performance to give system builders more opportunity to provide differentiated solutions. Also, they say, it should help with margins.

But technical challenges still remain. Among other things, executives told Intel Developer Forum attendees they are still working on thorny thermal issues that accompany higher-performing chips, and that smaller-form-factor chassis, which the market has been seeking, remain difficult to build and integrate efficiently. Both are considered important issues to system builders.

And then there's the matter of hardware profit margins.

Jetta International's Su said that in an environment where Dell and Hewlett-Packard have been able to exploit their economies of scale and pricing leverage, keeping Intel partners competitive and profitable will be a key challenge.

"Right now, nobody in the channel is able to compete with these guys on quantity," Su said. "With less quantity, you're not going to get the same price."

Some system builders and resellers have said in recent interviews that aggressiveness by Dell and HP in pricing has forced them to make cuts as well—with system builders in some cases seeing 5- and 6-point margins now on systems that a year ago netted them 12 percent.

The matter of Intel's price advantages to large OEMs reared its head last week in Japan. After an investigation, the Japan Fair Trade Commission issued a statement calling Intel's pricing practices unfair and demanding the chip maker change its ways. AMD, among others, applauded the move. For its part, Intel denied any wrongdoing and suggested it was being penalized for common-sense business practices in offering better pricing to volume customers. But while some solution providers still say pricing disparities with large, multinational vendors continue to be a drag on the channel, Great Lakes Electronics Distributing's Boyczuk said he believed the issue has largely been smoothed out.

"I think Intel does fully understand how to price their products between the multinational corporations and the channel, and that there is a bare differential," Boyczuk said. "I don't see any gray market activity on Intel products like I see on other products." If there was a significant price delta between the larger OEMs and the system builder channel, Boyczuk said, gray market Intel products would be much more prevalent.

During his interview with CRN, Otellini was interrupted by another Intel employee when asked what he would tell channel partners the company's strategy is for the rest of 2005.

"A lot of hard work," said the employee—none other than Barrett. After an initial laugh, Otellini simply nodded and repeated, "A lot of hard work."