Can Intel's 'Tick-Tock' Road Map Survive The Recession?

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Microprocessor giant Intel prides itself on pushing out cutting-edge technology at a lightning-fast pace. But the current economy calls into question whether the vendor's strategy still makes sense.

After falling behind smaller rival Advanced Micro Devices on multicore technology several years ago, Intel unleashed a new plan to set the pace of innovation by tightening product development cycles and hitting yearly road map targets with metronomic precision.

They call the strategy "tick-tock." And for the past several product cycles, it's worked a treat, delivering dominant market share and attendant profits to Intel even as AMD and other chip makers struggled to keep up. Spearheaded by CEO Paul Otellini, Intel's leadership demanded flawless product road map execution, and the company's engineers delivered.

But can Intel keep it up?

Few would doubt that the Santa Clara, Calif.-based chip maker has the organization and the brainpower to nail whatever road map targets it sets. But execution isn't the issue. The question is whether Intel has the kind of mutant marketing superpowers that would be required to continue shipping the most expensive new processors and platforms in a climate of severe cost-cutting, project postponements and all-around economic uncertainty.

The chip giant has deep pockets and could theoretically bull its way to the recovery without changing a thing. But some Intel channel partners, most of whom have considerably less wiggle room, say they're concerned that the company's normative "tear-down, start-from-scratch" product cycle isn't appropriate for current market conditions -- or the current needs of the system integrator channel.

And is it really in Intel's interests to keep driving in the fast lane when everybody else is pulling off the highway? Can "tick-tock" survive the worst economy since the Great Depression?

Bad Numbers, Worse Guidance

The semiconductor industry has been hit hard and fast by the global economic downturn. Intel is no exception -- the chip maker saw its fourth-quarter revenues drop 19 percent compared with the previous quarter, the first time in years Intel did worse in Q4 than in Q3. The profits picture was even more frightening: Intel's net income in the last quarter of 2008 declined a whopping 90 percent vs. the fourth quarter of 2007.

And that's not the end of it. In fact, it's going to get worse, promised a less-than-jaunty Otellini during Intel's recent fourth-quarter earnings call with analysts. Intel wouldn't provide formal earnings guidance for the current quarter, but Otellini said that "for internal purposes, the company is currently planning for revenue in the vicinity of $7 billion" -- which would be a 28 percent decline from the $9.7 billion Intel hauled in for the first quarter of 2008.

How bad will it get? Bloomberg last week cited an internal Intel memo in which Otellini reportedly told employees that the company's prospects for finishing the first quarter in the black were "too close to call."

Intel has turned a profit for 87 straight quarters, even surviving the dot-com implosion in the early part of this decade without going into the red. Don't think this recession is for real? Just imagine that remarkable streak of profitability ending.

"We are not going to wake up in six months with everything rosy again," Otellini wrote in the memo.

Against this bleak backdrop, it's understandable that Intel recently pulled out one of the most reliable weapons in its inventory-thinning arsenal -- slashing processor prices. The company cut prices by as much as 48 percent for some 20 older chips in its lineup.

It's the old quandary: The market isn't buying, inventory is sitting around costing companies money and it's become crucial to get parts out the door by any means possible. "Inventory is king," said Otellini during the earnings call.

That's a message that hits home with companies downstream from Intel. Everyone is seeing demand for new hardware dry up, from the PC giants like Hewlett-Packard and Dell to the smaller whitebox players in the channel that make up some 40 percent of Intel's global business. The computer makers, struggling to clear inventory, have passed along their pain to the component manufacturers like a punch to the gut, hence the flurry of price cuts from the likes of Intel and Sunnyvale, Calif.-based AMD. Slashing prices for older products does have a lot of appeal for channel partners, as much needed leverage to help pry open locked-down consumer and business pocketbooks, said longtime Intel partner Joe Toste, vice president of marketing at Minneapolis-based whitebox builder Equus Computer Systems.

But such efforts to jump-start the market, coupled with an apparent lack of demand for Intel's higher-priced new chips and platforms, is also going to mean drastically falling margins -- for both the chip giant and its channel, Toste said.

At least it's the sort of pain Intel was up-front about on the recent earnings call. Intel executives warned of gross margins dropping from 53 percent in Q4 to "the low 40s" in the current period.

"Regardless of how Intel plans to roll out new technology, they have no choice but to go through these price bands at some point," Toste said. "I don't see that fundamentally changing for Intel or AMD. The difficulty is, when you have a strong economy, they can make more margin by keeping a part at a higher price for longer. You can keep a price point going for four, five months. Now they have to drop prices after two or three months."

Intel also recently announced the planned shuttering of five of its older manufacturing facilities by the end of 2009 -- actions that will affect between 5,000 to 6,000 employees, or about 7 percent of its current workforce.

Such moves would have big repercussions in ordinary times, but again, these may not be ordinary times. Will price cuts and fab shutdowns be enough for Intel to find some rosy morning to wake up to, sooner rather than later?

Next: The Tick And The Tock Of It

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