Chip giant's ventures into other markets have not always paid off, writes Karlin Lillington

It's the world's most successful microchip company, its chips are inside 80 per cent of the world's PCs, and it employs over 100,000 people - twice the population of Limerick.

So how did microchip giant Intel, which employs over 5,500 people in Ireland, find itself hogging headlines internationally, having to announce 10,500 redundancies and a root and branch restructuring of the company this week?

It's a question analysts and pundits are mulling over, even as Irish employees breathe a sigh of relief at finding they are not likely to be affected in the first tranche of job cuts this year, and will probably be minimally affected by round two next year.

The background to the upheaval comes in Intel's second-quarter financial results last April, when chief executive Jim Otellini predicted Intel's first sales drop in five years and management said the company was unlikely to meet its 2006 sales forecasts.

Revenue for the second quarter totalled $8 billion (€6.2 billion), and net income was €885 million, but these figures were a 13 per cent and 57 per cent drop, respectively, on the same quarter a year ago.

At the time, Otellini announced the company would conduct an internal examination. "We are going to restructure, resize and repurpose Intel to adjust to the business realities of today and tomorrow," he said.

The results surprised and displeased many. The PC and server markets have been growing and Intel, after all, is - no pun intended - no bit player. With Microsoft, it is one of the most monolithic of technology companies and one of the best recognised in the sector. This is largely due to its ingenious, long-running "Intel inside" advertising campaign that, against all odds, got consumers to notice the brand of a small piece of silicon buried deep inside their PCs.

The company, founded in 1968 by Gordon Moore (of "Moore's Law") and Robert Noyce with long-time leader Andy Grove, is what led to Silicon Valley gaining its moniker. It was Intel's silicon that was central to creating a whole economic sector worth billions of dollars.

It has shared the burdens as well as the financial rewards of market dominance. It has been the subject of numerous anti-trust investigations, including two by the US Federal Trade Commission (FTC) in the 1980s and 1990s, civil suits, even an espionage case where an Intel employee received a three-year sentence for trying to sell chip design information to rival Advanced Micro Devices (AMD) - AMD itself alerted the authorities.

AMD, which has always struggled to win market share against Intel, is now seen as one reason for Intel's current woes. It has tied down contracts with some of the biggest computer manufacturers, notably Dell, late last year.

AMD now has 26 per cent of the market for the chips that drive more powerful PCs that run internet software, known as servers, with reports circulating this week that Dell could put AMD chips in up to half its servers. The opening for AMD is believed to have come from the oldest business mistake in the book - Intel taking its eye off its core business ball.

Intel's core business is chips and chipsets and while it has maintained focus on bringing new chips online - recently releasing half a dozen into the market, to generally good reviews - it has also been venturing into other markets where many analysts feel it doesn't belong. As the global economy began to recover post-2001, Intel made a strategic decision to try and drive the market for chips by pushing products and services in related areas, even selling consumer items such as digital cameras, webcams and video phones for home PCs.

The company also manufactures two types of flash memory, one called NOR, and has seen its market decline (this is also the type made in Ireland - which may be hit by job cuts next year).

Intel has also been involved, with mixed results, in telecommunications equipment and datacentre hosting. And it has an investment arm, Intel Capital, that has investments in areas like entertainment, e-payment and broadband. Recently, the company has indicated a strong interest in WiMAX, or wireless broadband. In July, Intel signalled its intention to divest and trim jobs in areas it believes are top heavy. Otellini announced 1,000 managerial positions, including some in Ireland, were to be shed, and sold off two communications divisions with about 2,000 employees.

This week, in a company-wide webcast, Otellini announced the company's broadest range of job cuts since the volatile 1980s. Though the pain is somewhat diminished by the fact that 5,500 of those jobs are already gone through the July actions and through attrition (and the cuts are somewhat put in perspective by the fact that Intel loses about 5,000 employees each year from attrition alone).

"These actions, while difficult, are essential to Intel becoming a more agile and efficient company, not just for this year or the next, but for years to come," Otellini told employees.

According to Intel, most of the remaining job reductions this year will occur in marketing and information technology functions.

In 2007, the reductions "will be more broadly based as Intel improves labour efficiency in manufacturing, improves equipment utilisation, eliminates organisational redundancies, and improves product design methods and processes," the company said.

Irish workers can expect to see some jobs go, but indications this week from employees were that there are always some interested in voluntary redundancy and that the process should be fairly painless.

Analysts will be pleased to see the cuts - though up to 20,000 had been predicted - and share prices bounced up from the point at which cuts were rumoured, reflecting market preference for some internal housecleaning at the chip giant.

But some say Intel is unlikely to go back to chips on their own and many analysts feel this would be a mistake - Intel needs to keep an eye on its silicon business, but must also always be looking for the next wave as new technologies proliferate.

Thus expects the giant, which somehow manages to be both cautious but forward-looking, to back out of unprofitable peripheral interests even as it invests in new areas. It's a tough balancing act, but a tightrope every successful technology company has to walk.