Barrett: Intel is investing now for benefits later

By DAVE GUSSOW

© St. Petersburg Times,
published October 15, 2001

[Photo: AP] Barrett was named president of Intel in 1997 and became chief executive a year later.

ORLANDO -- Good economic times come and go, says Intel chief executive Craig Barrett. But technology companies can't let bad times stop them.

Intel, the world's largest chipmaker, is investing $4-billion in research and development and $7.5-billion in new production facilities this yeardespite the downturn in PC sales and the broader recession. Intel, he says, will be ready when the good times roll again.

"You have to continue to innovate and invest," Barretttold the St. Petersburg Times. "That's the only way you come out of a recession stronger than when you went into it."

Barrett, 62, was named president of Intel in 1997 and added the title of chief executive the next year, succeeding Andy Grove, who remains the company's chairman.

Barrett has moved to expand the chipmaker into new markets, including networking, information appliances and Internet services. But results have been poor and come at a time of flagging demand for PC chips.

"Can CEO Craig Barrett reverse the slide?" asks a headline on the cover of the current Business Week. And Fortune magazine chimes in: "Why in the world are Craig Barrett and Andy Grove smiling? Bad breaks and dumb moves have zapped Intel's stock price. But now this duo plans to wreak havoc on the chipmaker's rivals."

Barrett stands by his decisions, remaining bullish that PC sales will pick up and Intel will thrive again during an economic rebound.

"Intel will see it through to the end. They have the money," said Gartner Inc. analyst Martin Reynolds, who added that Barrett has made necessary choices to expand the company's revenue base.

Barrett talked with the Times about the state of Intel and technology. He would not discuss specifics of the company's finances,saying the company isin a quiet period before earnings are reported.

Here are edited excerpts from that conversation:

Q. What have you learned, looking back from the high point of the industry in the past couple of years? And, now that you're in a down cycle, what are you learning from that?

Barrett: I think it's a very complex scenario. We've been through lots of down cycles before. . . . People overbuilt capacity or there's an economic slowdown, exacerbated this time. I'll leave the Sept. 11 event off because I think that's kind of peripheral to the whole issue right now.

But we had a combination of things that happened. We had the Y2K scare and the bug scenario, and the business community bought ahead in anticipation of that investment. We then had the whole dot-com euphoria meltdown and the overexuberance in the telecommunications industry from an investment capital standpoint. All three of those things, plus a superimposed, long-overdue business slowdown and recession in the U.S., I think, had combined. It's one more factor there than The Perfect Storm. Like The Perfect Storm had three things that happened. Well, here we've had four things that happened which have impacted the industry.

So it's the steepest drop the semiconductor industry's ever seen, depending on whose forecast you look at. Now it's somewhere between a 25 and 35 percent year-upon-year drop. 1985 is the most dramatic anybody could remember up to this stage, and that was a 15 or 16 percent year-upon-year drop. So this is a pretty dramatic event.

Having said all that, what have we learned? I don't think I've learned much new out of it, other than recessions happen, they are extremely difficult and tough when you're in one of them, and the only thing you can do when you're in one is to continue to invest your way out of it. And our investment is new products and new technology. It's the only thing that allows you to be strong on the upside, coming out of recession. So we continue to invest in new products, new manufacturing technology, new manufacturing plants.

Q. You've been very bullish about the Internet, but has the dot-com meltdown changed your perspective on the Internet's potential?

Barrett: No. The things that haven't changed when you look at the last year or so has been the number of people who are becoming Internet users. That continues to grow and the Internet traffic continues to grow exponentially. What died was the portion that you guys all wrote about, the business-consumer side, those were all the ridiculous valuation companies. But I think most people who were looking at the Internet and looking at it from a commerce standpoint, a business-to-business commerce standpoint, recognized that business-to-business was always where the ultimate action was going to be. So I think the Internet is alive and well and healthy as ever.

Q. Let's talk about speed. It seems that Intel has left the consumer behind a little bit. The consumer in the past couple of years seems satisfied with the level of performance he or she has had . . .

Barrett: Most reporters assume the consumer is satisfied with their performance.

Q. But you think they're not?

Barrett: I was just communicating with my daughter, who just bought her children a 1.5-gigahertz PC to supplement the -- I can't remember if it was a 400 or 500 megahertz -- PC they had before. My kids rip CDs, my grandkids rip CDs. My daughter's now complaining she can't listen to the radio station in the car because the kids have CDs they want to listen (to) that they've created. They weren't satisfied with a 400 to 500 megahertz machine. They got a 1.5-gigahertz machine. Any of the extended PC applications -- the rich communication applications, the audio/digital video, any of that stuff -- I think there is substantial, substantial performance enhancement to the end user with more processing power, more hard-drive capability and better bandwidth.

Do you like watching the hourglass on your PC? Nobody does. You hit Enter, you want something to happen. And how much is your time worth to you? How much is the consumer's time worth? If you can format a CD in 30 seconds rather than five minutes, how important is that to you?

I perfectly agree with the contention that you can only type so fast, therefore if you're doing word-processing, 500 megahertz is good enough. The issue is, people use PCs more than (to)type. They use PCs for rich communication, they use PCs to organize their image files, their picture files, they use them to do video, they use them to do content creation, they use them to send rich communications back and forth. In those cases, horsepower matters.

Q. One of Intel's initiatives in recent years has been its "extended PC philosophy," to show how other consumer activities such as music and photos can revolve around the PC. Has it shown you particular activities that most interest consumers?

Barrett: The areas that we're involved with in consumer products -- MP3 players obviously; digital cameras, obviously; children's toys; videocam, when kids do their own video or sound morph, that sort of stuff -- they indicate youngsters are incredibly adaptable to technology, whereas adults are not and, in the end, kids just take to this thing like ducks to water.

But increasingly, people are interested in taking all of this new digital stuff -- imaging, video, audio -- and basically creating their personal content, and that's what they do with a PC. We have a tag line, the PC's the "center of your digital universe," or extends your digital universe. That's where we do consumer devices. We're a small player in that space, but we just like to show what can be done and to participate in that. It keeps us abreast of what's going on in that space.

Q. A couple of years ago, Intel put out a video called Anywhere in the Home. That had a vision in which the home of the 21st century would have a chip in everything. You would have a smart refrigerator, you would have TVs and phones in your mirrors and things like that. Where is that vision today?

Barrett: I think it's happening. You've got chips in everything. My toaster has a chip in it. My refrigerator (has) got that; all my refrigerators have digital displays in them. "When this light turns green, replace your water filter" and all that stuff.

The thing that hasn't happened to any great degree yet is the home network, and networking the information from these embedded devices together and having central intelligence control all of those things. You clearly are going to be able to in the future address your home PC over the Internet, tell it to turn the heat up, heat down or the air conditioner on or something of that sort.

I think a lot of that talk may be very futuristic. What good is it going to do to tell your washing machine to turn on if you're not there to put the dirty clothes in it, for example? And if you're there to put the dirty clothes in it, why don't you just turn the washing machine on? But there's a lot of information feedback that is possible.

Q. One of the things you mentioned is Intel's program to provide each employee with a PC, which means some of your own employees don't have their own machines. Is that a high percentage?

Barrett: You put this in perspective. The cost of our home PC program -- PC, printer, a few peripherals and Internet connections: maybe $1,500. Six months' salary for a Malaysian employee, so we purposely started distributing our home PCs to our offshore employees because they're typically lower salaried. I wish I could show you some of the e-mails I get from these people about, "We discovered the Internet," "All my kids are in school; they can do this now," "This is the most fantastic thing that's happened to us." You read those, you just kind of get teary-eyed and see the impact you're having on people.

In the United States, I think, it's much less of an issue. I would hazard a guess that essentially all of our U.S. employees have a PC of some type.

Q. You've talked about international prospects as one of the growth-area potentials for Intel.

Barrett: We do over 60 percent of our business internationally today. China is essentially the second-largest computing consuming nation on the face of the Earth now, bigger than Japan, bigger than any of the European countries. India is just a couple of years behind China. We go to Malaysia, the Philippines, Thailand, you see the same thing. There's this immense hunger for this capability.

There's this immense education ethic in China. PCs rank right after refrigerators and TV sets. That is the most desirable item to purchase in China, ahead of a car. And the reason is that parents are dedicated to their child's potential success and they recognize that success is going to depend on computer literacy. So the international issue is huge.

Q. Do you still see Windows XP (the new version of Microsoft's PC operating system for computers) giving the market a little bit of a lift? Or is that more uncertain because of Sept. 11?

Barrett: It's tough to tell. (We) were talking about this on the way out here, how Microsoft is going to position it. The mere fact that the newspaper is full of articles about how Microsoft is going to position it. (Laughs.) I thought it was very interesting. The real question is a lift off of what? Every new PC, basically, to the consumer marketplace is going to ship with XP, there's no question about it. Not all business computers will ship with XP, but all the consumer stuff is going to ship with it because why would anybody buy yesterday's software system if they're a consumer, if they don't have compatibility issues? So, yeah, it's excitement.

Microsoft is going to spend a bunch of money. And, by the way, it's a cool operating system, great user interface, it really does extend the whole concept of rich data and it's reliable and stable, so, yeah, any techie ought to get excited about it. Anybody who's a first-time buyer ought to get excited about it. So it's got to give some boost. The real question is probably a boost off of what base? The Sept. 11 issue has really depressed consumer demand, consumer confidence, and that's the one that nobody knows for sure.

Q. You've been described as a risk-taker as a CEO, that you're willing to take chances and go places where the company hasn't been before. Looking back, are there things you wish you had done differently, or are there things that Intel has gotten into that you wish it hadn't?

Barrett: Well, if I had the foresight two years ago to know what was going to happen in the economy, I would have done a few things differently. Some of the companies we acquired, I would have waited to acquire them, they'd have been much cheaper, probably would have had slightly different direction in a few areas. Overall, I'm very happy with the strategy we have today. The areas that we're focusing on and some of those focus areas are entirely driven, predominantly driven, by acquisitions that we made, so I still would have made those acquisitions.

I'm not so sure that I'm that much of a risk taker. I was very satisfied and in agreement with the strategy we had before. During the '90s was the PC revolution and by Intel focusing all of its guns on the PC, I think we were able to ride the wave just at the crest and never fall off, and that's precisely where you want to be. I think we did absolutely the right thing. Now that that business has slowed down some, it's important for us to diversify, do some other things, and look for some other growth areas to supplement that sort of growth we had from just the PC. So that has required us to take some risk or gambles in moving into new areas, but you shouldn't read this so much as Craig Barrett became CEO a couple of years (ago) and therefore Intel's changed directions.

It's really the whole environment has changed. And I think we did absolutely the right thing under Andy Grove's CEO tenure -- focus, focus, focus -- because we had a huge opportunity. And now the environment's changed and so we should focus this change. Call that risk-taking; I call it being a pragmatist, a realist responding to the environment.

Q. You recently ended your advertising campaign with the Blue Man Group. Was that hard to give up?

Barrett: They were fun. We used the Blue Man for a very simple reason. We wanted to get name ID for the Pentium and so wanted something that would catch your attention, and those guys catch your attention, don't they? You hate them, but you know about the Pentium 4. So it served the purpose.

-- Transcripts were prepared by Times editorial assistant Barbara Moch.

Craig R. Barrett

Job: President and chief executive, Intel Corp. Joined company in 1974

Age: 62

Education: Stanford University, bachelor's and master's degrees and a doctorate in materials science

Company revenues: $33.7-billion for 2000 fiscal year ended Dec. 30, 2000

Earnings: $10.5-billion, or $1.51 per share

52-week high stock price: $47.87

Friday's stock close: $25

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