How One Tiny Chip Changed The World

Investor's Business Daily

When Robert Noyce and Gordon Moore founded Intel in 1968, they came up with what they called the "Goldilocks strategy.

They wanted to make memory chips, and started with three very different technologies. One was too easy for rivals to copy. Another added too much complexity.

"And the third one, using a different kind of transistor, called a MOS transistor, turned out to be just right," Moore said in an interview years later.

Intel (INTC) would apply the Goldilocks strategy again years later when it made the leap to microprocessors, launching it to global titan status.

Its chips powered the PC revolution, bringing cheap computing to every desk. Its relentless innovation and clever "Intel Inside" branding helped the company reach new heights in the 1990s as the Web made the Internet a global obsession.

Intel shares rose 22,132% from its August 1986 low to its peak in August 2000.

"The company has really pushed leading-edge technology as a corporate philosophy and strategy," ex-CEO Craig Barrett told IBD. "Look at the stuff it's brought the world. Intel has been there every time the rest of the industry says it's time to slow down.

Out Of Memory

But in the 1970s, Intel was making a good living selling memory chips when Japanese companies teamed up to attack and take over the market, according to Barrett, who joined the company as a manager in 1974.

"We were getting our butts kicked in the memory market," in the 1970s and early '80s, Barrett said. "The Japanese were taking over and we were looking for some place to go to excel.

That's when Intel struck gold.

Intel's big break came in 1981 when IBM chose an Intel microprocessor to power the first commercially successful personal computer, the IBM PC.

Intel engineer Ted Hoff had invented the microprocessor in 1971. A microprocessor is a programmable device that fits on a sliver of silicon. Essentially, it's a tiny computer. It stores software and also runs software stored elsewhere on the computer.

By the early 1980s Intel was a leading microprocessor maker, and its chips ran more software than many of its competitors.

High Tech, Low Price

An Intel spokesman recently told IBD that it was a competitive process but for IBM (IBM) "it had a lot to do with ease with which they could deploy their systems.

IBM decided to buy parts on the open market to keep the price down and boost sales. Intel could supply large quantities of fast, cheap chips that could run the software IBM wanted on its PC.

IBM picked Microsoft (MSFT) operating software. The software maker's future co-founders Bill Gates and Paul Allen had built their own personal computer as teenagers using an Intel chip.

IBM gave its new chip partner, wobbly from the Japanese memory market attack, a large capital infusion. Big Blue in December 1982 said it would buy $250 million of Intel stock, giving Intel the resources to fend off Japanese companies that were eyeing the microprocessor and do R&D on its next-generation chip.

Dan Hutcheson, CEO of chip industry market tracking firm VLSI Research, says Intel proved by the early 1980s that it was the undisputed industry leader — partly just by staying alive.

"It's an amazing company, not just for being innovative but in not dying like most companies do. Instead, Intel reinvents itself," on a regular basis, he said.

The IBM PC came to dominate the personal computer market, opening the floodgates for PCs to show up on more than 1 billion home desks and countertops.

IBM decided not to hold Intel to an exclusive contract, so other PC makers such as Dell and Hewlett-Packard (HPQ) began to buy its processors.

Intel quickly became the industry standard, with the exception of Apple (AAPL), which at that time used a Motorola chip. Today, Apple also uses Intel processors.

"Intel basically — I guess you could call it foresight — could see microprocessors would be great and would bring a big computer revolution," Barrett said, adding, "In the early '80s when the PC market took off, it was the same excitement about that market as when the company started.

Barrett credited Noyce, Moore and Andy Grove. Grove was Intel's fourth employee and CEO from 1987 to 1998, during the bulk of the stock's long run.

"It was their vision and foresight that made the company happen," he said.

'Copy Exactly'

Barrett, who succeeded Grove as CEO and ran Intel from 1998 to 2005, in the 1980s developed its vaunted manufacturing network, using what he called the "copy exactly" method. Every Intel factory is, as much as possible, an exact copy of all others. This ensures high, consistent quality no matter where on the globe Intel makes its chips.

Barrett says Intel bet its future on a presentation Moore gave when he was at Fairchild. Moore said that by shrinking the size of chip features, their power could roughly double every two years. That principle came to be known as "Moore's Law.

Moore's Law To Improve

Although it's not a law of physics, the industry has followed it for nearly 50 years.

"Moore had made computing power affordable" for consumers to put on every home desktop, Hutcheson said, adding, "Intel has used Moore's Law as a guide better than any other company in history.

The IBM PC debuted in August 1981, powered by an Intel 8088 chip that ran at 4.77 megahertz. Intel has rolled out ever more powerful chips. Its current flagship Core i7 processor runs at 3.5 gigahertz, about 734 times faster than the 8088.

Intel chips expanded into servers as the Internet boomed, vastly increasing the need for high-powered computing.

Intel remains the PC chip leader, but it's had a tougher time since the dot-com bubble burst in 2000. PC sales are falling fast as consumers shift to mobile devices.

Smartphone Static

Its chips are in HP, Dell, Samsung and Lenovo tablets. But Intel has struggled to crack the smartphone chip market, which is dominated by Qualcomm (QCOM), U.K.-based ARM Holdings (ARMH) and Korea's Samsung, which makes many chips that go into its own smartphones.

Hutcheson says Intel is making headway. "The company has doubled down on mobile phones and accelerated the rate its mobile silicon is coming out," he said.

Barrett said he would like to see Intel stay on the road it's paved for itself.

"I'd like them to do pretty much what the company has done in its history, continue to invest heavily in R&D and move the market forward to bring out new products and not be afraid of competition.

Asked what challenges entrepreneurs wanting to start the next Intel need to be aware of, Barrett said stay focused and ignore negative buzz. "If you've got a great new technology, focus focus focus onto it," he said.

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