Inside Intel’s Inertia: Investment Lessons from the Silicon Giant’s Misstep

Intel He’s had a pretty turbulent few weeks. Is commercial value has plunged by two-thirds since 2021, driven by falling sales and missed opportunities in AI, which have led to job cuts in an effort to cut costs. Still, Intel managed to reach an agreement with Amazon develop custom chips for Amazon Web Services, giving a boost to its third-party services foundry business. On top of that, Qualcomm is said to have approached Intel for a possible purchase, while Apollo Global Management made a multi-million dollar investment offer to support the CEO. Pat GelsingerThe recovery strategy.

Despite its current challenges, Intel was once a dominant force in the industry. Founded in 1968 by Robert Noyce and Gordon Moore (both leading figures in California’s electronics industry before it became known as Silicon Valley), Intel played a critical role in developing and commercializing fundamental technologies that have shaped the modern economy. . electronic industry.

In Inside IntelTim Jackson notes that Intel’s initial emphasis on innovation shifted toward delivering practical products to dominate the market. In the late 1970s, Intel faced strong competition from Motorola’s top 68000 chip. In response, Intel launched Operation Crush in 1979, led by Bill Davidow, to establish the 8086. microprocessor as an industry standard. The campaign emphasized compatibility and strong support, winning key manufacturers such as IBM, whose adoption of Intel’s 8088 for its first PC cemented Intel’s position in the market, even with technically inferior chips.

In the 1980s and 1990s, Intel employed an aggressive litigation strategy to protect its market position, frequently suing competitors such as AMD and Seeq Technology, as well as former employees, often over intellectual property. Intel’s general counsel even had performance targets for filing a set number of lawsuits each quarter. While not always successful in court, this approach effectively deterred competitors by imposing significant legal costs, reinforcing Intel’s dominance in the microprocessor industry.

Additionally, Intel invested significantly in branding, moving from targeting industry insiders to appealing directly to consumers, understanding that consumer preferences would influence manufacturers. The “Intel Inside” campaign established Intel as a household name, while consumer-friendly names like “Pentium” fostered brand loyalty. These efforts made Intel synonymous with quality, strengthening its market dominance through strategic branding and legal measures.

A key problem with misaligned strategies, even when they succeed, is that they often fail when the ecosystem changes. Intel missed a crucial opportunity with the iPhone by failing to reach a deal with Apple, leading to ARM-based processors dominating mobile devices. Apple’s adoption of Samsung chips and later its own ARM-based designs solidified ARM’s position, while Intel struggled with power efficiency in its Atom processors. This change marked a turning point that Intel was unable to take advantage of. In the GPU market, NVIDIA it surpassed Intel by focusing on graphics and AI processing, while Intel remained obsessed with CPUs. Nvidia’s early adoption of GPUs for AI workloads helped it capture the AI ​​hardware market. Nvidia has now surpassed Intel in revenue ($60.9 billion for fiscal 2024, versus Intel’s $54.2 billion). Gelsinger is working to revitalize Intel by restructuring its operations, separating design from manufacturing and opening its foundries to outside customers. It aims for Intel to become the second-largest foundry by 2030, investing heavily in manufacturing and seeking external financing and government support. Additionally, Gelsinger is focused on closing the gap in the AI ​​chip market, where Intel lags behind competitors like Nvidia.

However, once a technology company misses a major market trend, recovery becomes challenging. Kodak, despite inventing the first digital camera in 1975, was hesitant to invest in digital technology, fearing it would undermine its profitable film business. Meanwhile, competitors such as Sony and Canon advanced rapidly in digital photography. Kodak’s reluctance to move from film to digital technology caused its decline in the photography industry.

Similarly, Apple and Amazon did to Sony what Sony once did to Kodak. Sony’s Walkman, a symbol of music in the 1980s and 1990s with more than 385 million units sold, was left behind when Sony hesitated to embrace digital music, prioritizing its CD business. In contrast, Apple launched the iPod in 2001 and the iTunes Store in 2003, providing a legal and accessible digital music platform. This integration of hardware and content allowed Apple to surpass Sony’s dominance in the music market.

Sony also took on Amazon in the e-reader market, but ultimately lost. Despite an early lead with touchscreen technology and sleek design, Sony lacked content and an integrated ecosystem. Amazon’s Kindle, with its wide selection of books, seamless experience, and competitive pricing, quickly dominated, forcing Sony to exit the e-reader market.

These studies provide valuable information for both entrepreneurs and investors. The sustainability of a company depends more on its culture than is often recognized. Entrepreneurs must remember that revenue generators, while crucial, cannot be the sole focus: what generated success initially will not guarantee future growth.

Investors often find it difficult to value fast-growing companies, as rising earnings often lead the market to project endless growth, inflating valuation multiples. A company’s culture significantly influences its terminal value, which is an important component of its valuation, particularly when there is aggressive investment in growth. Traditionally, maintaining a margin of safety served as a reliable protection against such uncertainties. However, increased liquidity has caused many high-growth investments to saturate operations. Understanding these dynamics can help avoid getting caught on the wrong side of such investments.