July 9, 2006 Cashing In Its Chips By DAMON DARLIN NY Times
http://www.nytimes.com/2006/07/09/business/yourmoney/09chip.html?pagewanted=print IT is not easy to beat Intel. It is not easy to beat Intel if you are running a company that many analysts and investors have written off as moribund and out of touch. It is not easy to beat Intel if you are running a moribund company that loses its chief executive to a heart attack just as he embarks on a risky strategy. But Texas Instruments beat Intel. Twice. And Texas Instruments, an early darling of the technology industry that later lost its way, accomplished this feat in bravura fashion, not by eking out a few extra percentage points of market share from Intel, the legendary silicon-chip giant. Instead, Texas Instruments scored throw-in-the-towel, pack-up-the-lab and sell-the-division kinds of victories. That, in turn, has emboldened it. "Rarely has a leader of a previous era succeeded in the next period," said Richard K. Templeton, a former salesman and engineer who rose through Texas Instruments' ranks to become its chief executive in 2004. "I think there will be a leadership change. If not Texas Instruments, why not?" Why not, indeed. More to the point, how did Texas Instruments, which posted revenue of $13.4 billion last year, arrive at the enviable position of considering itself primed and ready to assume Intel's mantle as standard-bearer for the entire chip industry? In short, it pulled off its own resuscitation a decade-long effort by abandoning ill-fitting product lines, focusing more closely on its core integrated circuits business and linking up with large but underestimated companies eager to champion new uses for its chips. It dusted off a chip called a digital signal processor and convinced Nokia, which had yet to become the leader in cellphones, to make it the core of its products. It dusted off a second underutilized chip called a digital light processor and wooed Samsung Electronics, then a scrappy South Korean electronics company trying to conquer the American market, to use it in big-screen, high-definition televisions. "Their efforts to get back to their I.C. roots by shedding so many other business lines could be characterized as 'focused diversity,' " said David Carey, chief executive of Portelligent, a firm in Austin, Tex., that analyzes consumer electronics components. "Pretty much one basket, but a lot of different eggs." FOR his part, Mr. Templeton says he believes that the path Texas Instruments is following is not only logical but also unavoidable. He views the entire technology industry as beholden to 20-year product cycles that introduce seismic changes. The mainframe computer business gave way to the minicomputer and then to the personal computer. Now, he says, the industry has entered the era of the hand-held entertainment and communication device. "It's unforgiving," he advised. "You can argue that the PC era isn't ending, but it is." It has been a long road back for Texas Instruments, a company that at the dawn of the electronics era a half-century ago created the first commercial silicon transistor and invented the integrated circuit. But Intel and other aggressive tech companies began running circles around it by the mid-1980's because Texas Instruments' corporate attic was cluttered with underperforming businesses that had nothing to do with chips, like oil and gas exploration services and radar and missile guidance systems. By the early 1990's, Intel was forcing Texas Instruments out of the PC microprocessor business, and analysts considered the company roadkill in Intel's relentless drive to dominate computer chip manufacturing. That crushing defeat forced Texas Instruments to reorganize and eventually go for what became the next big thing: cellphones. Jerry R. Junkins, Texas Instruments' chief executive at the time, began an effort to slim down the bloated company: he started selling off nearly everything except the chip business. But in 1996, Mr. Junkins died of a heart attack on an overseas business trip. His successor, Thomas J. Engibous, finished the garage sale. Out went radar and missile-guidance systems, mold manufacturing, inspection equipment, software and chemicals. He forced the company to stick to its knitting by nurturing a chip that was the brains in the Speak & Spell educational toy, the one E.T. used to phone home in Steven Spielberg's blockbuster film. It turns out that Mr. Engibous and the movie alien were both on to something. That chip, a digital signal processor, is now the core technology in cellphones. And the Texas Instruments manager who made it a cash cow by forging a tight relationship with Nokia was a tall, square-jawed engineer Mr. Templeton. His deal with Nokia became a template for the company's future successes. He aligned Nokia's and Texas Instruments' interests by having his engineers customize the D.S.P. chip for Nokia's phone software. It wedded the Finnish company to Texas Instruments and the successful partnership attracted other phone makers to the Dallas chipmaker. Today, Texas Instruments controls 58 percent of the $8 billion market for wireless phone chips, the fastest-growing category in the semiconductor business, according to Forward Concepts, a market research firm. Texas Instruments' chips also allow a new generation of cellphones to display video images and capture network television broadcasts. The success of wireless phone chips secured Mr. Templeton the top job at Texas Instruments in 2004. (Mr. Engibous is now chairman.) MR. TEMPLETON wasted little time pushing the company to duplicate his success with cellphones by moving Texas Instruments chips into the next generation of consumer electronics. That set up the company for a confrontation with an old nemesis: Intel. This time around, Texas Instruments scored its twin victories. Its dominance of the market for large-screen television processors chips that use millions of tiny mirrors forced Intel to halt development of a rival chip two years ago. Then, last month, Intel announced that it was giving up its efforts to make processing chips for cellphones and that it planned to sell that operation to Marvell Technology. Mr. Templeton said Texas Instruments had outflanked Intel by acting as a design lab that could help realize any customer's ambitions. "When they invent, they grow faster, and that is good for us," he said. "We can build a relationship with every company that needs a chip." Will Strauss, president of Forward Concepts, said that Intel never gave cellphone processors the attention it should have. "At Intel, they're focused on selling more Pentiums." An Intel spokeswoman said that the company is selling its cellphone processor business because it is not a strategic fit with its core chip business. While she also said that the company has made significant progress and landed major customers over the last year, she declined to comment on competition from Texas Instruments. "Intel does not comment on its competitors," she said. Chips from Texas Instruments are now in digital cameras, like the Kodak EasyShare with a wireless connection; MP3 players; the new Apple Hi-Fi boom box; and Sling Media's Slingbox, which sends television programs from your TV to a PC no matter where in the world the PC is. Texas Instruments chips also make Internet phone calls work and are inside new digital cinema projectors. In fact, its chips are the guts of a new generation of electronic devices, either hand-held or used in a car, that are stealing communication and entertainment functions from PC's. All of this is evidence of what Mr. Templeton sees as another technology cycle: the ratio of devices to people. About 1,000 people used each mainframe in the heyday of those machines, he says. About a hundred people used a mini. A single person commanded a PC. But in the next era, the relationship flips, he said. Instead of counting people per device, what becomes paramount is the number of devices per person. Owning three or more hand-held entertainment devices is now commonplace, as any teenager (Mr. Templeton has three of them) who carries a cellphone, an iPod, a camera and a game machine can tell you. Mr. Templeton asserts that the shift to hand-held and mobile devices means that Texas Instruments, at long last, is in the right place at the right time. Net income grew to $2.3 billion last year from a loss of $201 million in 2001. Wall Street analysts, though, have been cooler to the company's stock lately. When Texas Instruments announced last month that it was projecting higher revenue and earnings, the stock dropped 3.4 percent, to $29.68. It is now at $29.17. Though more than half the analysts who watch the company give it a buy rating, many say they are wary because they see growth for wireless handsets cooling if you call projected 13 percent year-over-year sales growth "cooling." "The company's positioning in higher-growth communications markets bodes well," said Glen Yeung, an analyst at Citigroup, but "small cracks in the handset supply chain are becoming more apparent." Even though more than 900 million cellphone handsets were sold worldwide last year and 950 million are expected to be sold this year, Texas Instruments knows it is facing a mature market in most developed economies. But Mr. Templeton says cellphone use will ramp up in emerging economies, where the first electronic device a person owns is typically a cellphone. India added five million subscribers in a single month last year, raising its number of cellphone users to about 600 million. "I don't know what the number will be, but it will be big and it will grow," Mr. Templeton said of India's market. Texas Instruments has developed a new phone chip, appropriately named LoCosto, for developing economies. The company's engineers condensed the functions of four cellphone chips onto that single chip in order to bring down the price of a cellphone to about $20. Motorola and Nokia are already using them in phones sold in countries including China, India, Bangladesh and Russia. Texas Instruments' key strategy for growth remains getting its chips into new consumer electronics products, no matter how unusual or small the company is that makes them. "We get very early access to what people are working on," said R. Gregory Delagi, who has Mr. Templeton's former job as vice president for digital signal processing systems. The company's early alliance with the inventor of the Slingbox is an example of this strategy. Three years ago, Blake Krikorian, a Silicon Valley entrepreneur, was working on a device to transfer television programs to his PC. He needed a chip that would stream data fast enough to avoid jerky video and long transmission delays. But a large semiconductor maker, which he declined to identify, was giving him agita. "The claims being made by this company were far more grandiose than what they could deliver," he said. In early 2004, a friend put him in touch with Alex Gorjanc, director of Silicon Valley sales for Texas Instruments. Mr. Krikorian was skeptical because Texas Instruments was big and he was not. "I thought they were one of those big lumbering giants," he said. To his surprise, Mr. Gorjanc met him the next day to see the Slingbox. Mr. Gorjanc tracked down Mr. Delagi that evening in Europe. "We got excited very quickly," said Mr. Gorjanc, who has sold Texas Instruments chips in Silicon Valley since 1985. THE Slingbox effort fit with what Texas Instruments calls its "catalog" strategy a willingness to court any customer, even if it means selling just one chip at a time. The company sees the philosophy as giving it a head start as consumers warm up to new technologies, and it embraces a widespread and diverse clientele. "We aren't smart enough to know which of these small guys is going to be big," Mr. Delagi said. Texas Instruments developed a digital signal processing chip with special software in time to put the Slingbox on store shelves in mid-2005, right on schedule. Sling Media has sold 100,000 of the devices over the last year, making the Slingbox one of the fastest-selling new electronic products in recent years. "They realized big wins don't just come from big companies; they can come from a couple of guys in a garage," Mr. Krikorian said. "There are not a lot of semiconductor makers that understand the new era." Mr. Templeton said every victory whether it involves new companies like Sling Media or old rivals like Intel makes his company bigger and richer. But becoming bigger and richer also means that its scrappy, underdog mojo could be lost to complacency. All of which Mr. Templeton also recognizes. He says his current challenge "is to keep this place humble and hungry, especially when we are winning." ================================ George Antunes, Political Science Dept University of Houston; Houston, TX 77204 Voice: 713-743-3923 Fax: 713-743-3927 antunes at uh dot edu Reply with a "Thank you" if you liked this post. _____________________________ MEDIANEWS mailing list medianews@twiar.org To unsubscribe send an email to: [EMAIL PROTECTED]
