Money couldn't buy Intel the mobile biz

Daniel Sorid

SAN FRANCISCO: At the height of the dot-com boom in 1999, Intel Corp. shelled out $1.6 billion for an acquisition that was supposed to give it a foothold in a cell phone market viewed as hotter than hot.

Last week, four years later, the world's largest chip maker admitted that the company it bought, DSP Communications, was more of a cold shower. Because the assets it bought are now worth far less than what it originally paid, Intel will wipe off $600 million from its balance sheet.

While the write-off represents only a small portion of Intel's business, analysts said the move reflects a frustrating reality for the Santa Clara, California-based company. Despite its dominance inside the personal computer, its attempts to buy its way into a leading role in the cellular phone chip business have mostly fizzled.

Intel's wireless computing and communications group -- which sells memory, baseband chips and processors for cell phones and handheld devices -- shrank by 12 percent in the first nine months of the year, even as the rest of the company grew. The group's operating loss swelled to $341 million from $196 million in the same period.

In a further admission that its strategy has not worked, Intel said that it would fold the money-losing unit into its networking business, and said the head of the cellular phone chip business would retire.

"Simply put, Intel had high aspirations in wireless and they haven't done as well as they thought they would," Lehman Brothers analyst, Daniel Niles said.

Intel executive concede that the company overestimated the pace of the adoption of more powerful mobile phones packed with multimedia features like cameras, bright color screens, and music players.

Spokesman Bill Calder said the company nevertheless intends to stick with its cell phone strategy, and said the company is well placed to succeed as faster cell phone networks pop up and phones are built to take advantage of them.

"It makes perfect sense for us to be in this business," Calder said. "We saw the market going this direction. We still see the market going this direction."

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Like a PC, a cell phone needs microchips to operate. Flash memory chips store names and phone numbers, baseband chips allow communication with cellular networks, and microprocessors churn through code to allow more advanced features like games and video.

Intel in the 1990s decided to diversify into the cell phone business. While it already supplied flash memory to cell phone makers, it needed a baseband, or communications, chip and a microprocessor designed to fit the form of a mobile phone.

Rather than develop the technology entirely by itself, it turned to acquisitions, spending $1.6 billion on DSP Communications, a maker of baseband chips. An acquisition of the semiconductor business of Digital Equipment Corp. in 1998 gave it the rights to a chip called StrongARM, which has since been developed into Intel's XScale processor.

Years later, Intel remains far behind leaders like Texas Instruments Inc. While on paper Intel appears to have a broad array of cell phone components -- and a brand name nearly unrivaled in the technology world -- the devil was in the details.

DSP Communications, as it turns out, had expertise in chips that connect with now-declining cell phone networks, whose popularity has been overshadowed by GSM and CDMA networks, said Martin Reynolds, a fellow with research firm Gartner Inc.

"It was the wrong timing," Reynolds said. "The challenge now is to develop the GSM and CDMA technologies, but it's pretty clear that they're not going to get that out of the acquisition they made in 1999."

Intel's core business is making microprocessors -- the command centers of computers. So when it developed its XScale processor for mobile phones, the expectations were high that cell phone companies would snap up their chips.

Instead, the mobile phone industry balked at a chip that was seen as unnecessarily powerful and power hungry, Reynolds said.

None of the big PC makers could even contemplate turning away the rock-solid Intel brand name, but that brand does not carry over into the cellular phone world, said William Frezza, a former Ericsson executive who is now a general partner at Adams Capital Management.

"They have no unfair advantage outside the PC world," Frezza said.

Today, Intel has very few deals to supply its XScale chips to mobile phone makers. Instead, the chips have been readily used by makers of handheld computers that run Microsoft software, where a need for powerful computing tasks and a small form-factor made the chip a good match. Compared to the market for cell phones, however, sales of handheld devices are paltry.

"Their successes are limited," said Reynolds. "Where computing is the primary target, Intel's done well. But where the phone is the primary target, they haven't done well yet."

Meanwhile, Intel's flash memory business remains strong. But even there, a poorly timed price hike last year has cut their market share and given rivals a better foothold, said Dan Scovel, an analyst at Needham & Co.

"The only firm foot they had planted in the communications space anyway was flash memory in the cell phone, and that's fallen out of bed this year," Scovel said.

Reuters