Is Intel getting communications act together?

Or, could it be that Intel is still running around in circles in communications chips?

In any case, Intel's long, expensive journey into the communications-chip market started just over two years ago, when it acquired Level One Communications Inc., a Sacramento, Calif.-based supplier of local- and wide-area networking devices, for $2.2 billion.

Following its surprising acquisition of Level One, Intel went on a major spending spree and acquired several other communications chip makers. Intel's move into this market followed a slowdown in its core PC business.

But as Intel began to assemble a large communications-chip portfolio, the company faced a major dilemma: it was competing against its major OEM customers.

For years, Intel sold a line of adapters, hubs, and routers under its own logo. With these products, Intel competed against 3Com, Cisco, and other OEMs. But on the other hand, Intel was also trying to sell its new communication chips to the same OEMs.

To rectify the problem, Intel last year split its communications chip and systems operations into two separate groups, in order to give the impression that the company was not competing against its customers.

Come together, right now

Earlier this week, however, Intel announced plans to combine these operations under a single group again, this time headed by Sean Maloney, its sales and marketing executive and a fast-rising star at the company (see March 14 story).

The move--which was apparently designed to streamline its operations--effectively abolished its two separate organizations: the Network Communications Group (NCG) and Communications Products Group (CPG). NCG was in charge of Intel's communications chip lines, while CPG was responsible for the systems-level products.

In the reorganization, Mark Christensen, vice president and general manager of the NCG, and John Miner, vice president and general manager of the CPG, will no longer have any formal responsibilities--at least for now, according to a spokesman for Intel.

In Santa Clara, Calif. the Intel spokesman said that the company implemented the reorganization following a new focus for both its communications systems and chip efforts. Six months ago, the company decided to re-focus its communications systems group from a supplier of branded products, to an OEM provider, the spokesman explained.

Because both its systems and chip groups are now going after the OEM community, it makes more sense to put these organizations under the same roof, he said.

Despite the reorganization, however, the jury is still out on Intel's communications chip business. Nearly two years after buying Level One, it is unclear if the group is profitable.

Intel does not break out its sales and profits for organization. But analysts believe that Intel's communications systems and chip business represents between 5% to 10% of the company's total sales.

Nonetheless, Intel faces an even bigger problem in this arena: the company and other communications chip suppliers have entered into the first-ever downturn in the networking business. And like the PC market, there's are no signs that the networking market will recovery in the near term.

It is also unclear that Intel has the products or intellectual-property (IP) to become a major force in some of the fastest growing parts of the communications chip markets. This include the following segments:

In the Gigabit Ethernet market, Intel is somewhat behind its competitors, especially in physical-layer (PHY) chips. The PHY chip, which handles the transmit and receive functions in a system, is one of the most critical components in a system.

Last year, Intel claimed to have shipped a single-port PHY IC for Gigabit Ethernet applications. But two other competitors--Broadcom Corp. and Marvell Technology Group Ltd.--have already shipped four-port PHY chips for Gigabit Ethernet networks.

At the high-end of this market, Intel has not made its intentions clear about the Ten Gigabit Ethernet market, nor has it developed a cohesive cable-modem and DSL chip strategy.

In 1999, Intel acquired the cable-modem chip business of Stanford Communications Inc. of Sunnyvale, Calif.

The move gave Intel an entry into the cable-modem chip business for head-end equipment in central offices. To date, though, Intel has not been a factor in the fastest-growing part of this business: the customer-premise equipment chip market.

The same is true for DSL. Last year, Intel jumped in he market by acquiring Ambient Technologies Inc. of Fremont, Calif. But Ambient made a critical error by developing a G.Lite-oriented chip line for its first product.

Needless to say, the G.Lite-based ADSL market never took off. In contrast, the full-rate ADSL market has become a major business. Intel offers a modem based on this standard, but the product is based on a competitive ADSL chip from GlobeSpan Inc., it was noted.

Down but not out

Intel won't fail on all fronts, however. Last year, it acquired a company called Giga A/S, a supplier of chips for OC-192 applications. At last month's Intel Developers Forum (IDF) in San Jose, Intel rolled out an impressive line of OC-192 chips, with forward-error-correction capabilities.

Another shinning star for Intel is network processors. In fact, the company's IXP1200 line of network processors has garnered several major design wins in the market against the likes of Agere, AMCC, Broadcom, Motorola, Vitesse, and others.

Intel has another advantage over its competitors: vast resources. With a huge war chest of funds, the company has the means to survive a downturn.

But it remains unclear if Intel has the patience to compete in this market, especially given the glacier-like design cycles.

It's also a market where "Intel Inside" doesn't really carry a lot of weight.