Paul Otellini's Intel: Can the Company That Built the Future Survive It?

As the CEO steps down, he leaves the Intel machine poised to take on the swarming ecosystem of competitors who make smartphone chips.
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In his cubicle at Intel headquarters, Paul Otellini shows a chip-circuitry diagram that is stitched into the lining of his sportcoat. (Alexis Madrigal)

Forty-five years after Intel was founded by Silicon Valley legends Gordon Moore and Bob Noyce, it is the world's leading semiconductor company. While almost every similar company -- and there used to be many -- has disappeared or withered away, Intel has thrived through the rise of Microsoft, the Internet boom and the Internet bust, the resurgence of Apple, the laptop explosion that eroded the desktop market, and the wholesale restructuring of the semiconductor industry.

For 40 of those years, a timespan that saw computing go from curiosity to ubiquity, Paul Otellini has been at Intel. He's been CEO of the company for the last eight years, but close to the levers of power since he became then-CEO Andy Grove's de facto chief of staff in 1989. Today is Otellini's last day at Intel. As soon as he steps down at a company shareholder meeting, Brian Krzanich, who has been with the company since 1982, will move up from COO to become Intel's sixth CEO.

It's almost certain that the chorus of goodbyes for Otellini will underestimate his accomplishments as the head of the world's foremost chipmaker. He's a company man who is not much of a rhetorician, and the last few quarters of declining revenue and income have brought out detractors. They'll say Otellini did not get Intel's chips into smartphones and tablets, leaving the company locked out of computing's fastest growing market. They'll say Intel's risky, capital-intensive, vertically integrated business model doesn't belong in the new semiconductor industry, and that the loose coalition built around ARM's phone-friendly chip architecture have bypassed the once-invincible Intel along with its old WinTel friends, Microsoft, Dell, and HP. 

And yet, consider the case for Otellini. Intel generated more revenue during his eight-year tenure as CEO than it did during the rest of the company's 45-year history. If it weren't for the Internet bubble-inflated earnings of the year 2000, Otellini would have presided over the generation of greater profits than his predecessors combined as well. As it is, the company machinery under him spun off $66 billion in profit (i.e. net income), as compared with the $68 billion posted by his predecessors. The $11 billion Intel earned in 2012 easily beats the sum total ($9.5) posted by Qualcomm ($6.1), Texas Instruments ($1.8), Broadcom ($0.72), Nvidia ($0.56), and Marvel ($0.31), not to mention its old rival AMD, which lost more than a billion dollars. 

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Of course, Otellini has both his predecessors' ambition and inflation to thank for his gaudy numbers, but he kept Intel a powerhouse. Under his watch since 2005, it created the world's best chips for laptops, assumed a dominant position in the server market, vanquished long-time rival AMD, retained a vertically integrated business model that's unique in the industry, and maintained profitability throughout the global economic meltdown. The company he ran was far larger, more complex and more global than anything Bob Noyce and Gordon Moore could have imagined when they founded it in 1968. And the business environment was certainly no easier than any encountered by the other four Intel CEOs. Yet he delivered quarter after quarter of profits along increasing revenue. In the last full year before he ascended to chief executive, Intel generated $34 billion in sales. By 2012, that number had grown to $53 billion.

"By all accounts, the company has been incredibly successful during his tenure on the things that made them Intel," said Stacy Rasgon, a senior analyst who covers the semiconductor industry at Sanford C. Bernstein. "Tuning the machine that is Intel happened very well under his watch. They've grown revenues a ton and margins are higher than they used to be."

Even Otellini's natural rival, former AMD CEO Hector Ruiz, had to agree that Intel's CEO "was more successful than people give him credit for."

But, oh, what could have been! Even Otellini betrayed a profound sense of disappointment over a decision he made about a then-unreleased product that became the iPhone. Shortly after winning Apple's Mac business, he decided against doing what it took to be the chip in Apple's paradigm-shifting product. 

"We ended up not winning it or passing on it, depending on how you want to view it. And the world would have been a lot different if we'd done it," Otellini told me in a two-hour conversation during his last month at Intel. "The thing you have to remember is that this was before the iPhone was introduced and no one knew what the iPhone would do... At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn't see it. It wasn't one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought."

It was the only moment I heard regret slip into Otellini's voice during the several hours of conversations I had with him. "The lesson I took away from that was, while we like to speak with data around here, so many times in my career I've ended up making decisions with my gut, and I should have followed my gut," he said. "My gut told me to say yes."

In person, Otellini is forthright and charming. For a lifelong business guy, his affect is educator, not salesman. He is the kind of guy who would recommend that a junior colleague read a book like Scale and Scope, a 780-page history of industrial capitalism. To his credit, he fired back responses to nearly all my questions about his tenure, company, and industry at a dinner during CES in Las Vegas and later at Intel's headquarters. And when he wasn't going to answer, he didn't duck, but repelled: "I'm not going to talk about that."

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