The Intel Octopus

Remember the octopus? Nearly a century ago, novelist Frank Norris came up with that image to refer to big businesses that, through cross-ownership agreements, gained effective control of whole industries. But the term isn’t just a musty reminder of the age of J.P.Morgan. It’s highly relevant today, in the highest of high-tech sectors-computing.

Is Intel the “Octopus” of the Information Age? Or has the world’s most profitable manufacturer simply found a better way to sponsor innovation?

These are the key questions about Intel’s audacious program-of unprecedented scale in the history of American business-to invest hundreds of millions of dollars each year in scores of small companies based on hot new technologies. In the past three years alone, Intel has invested a cool billion in hundreds of projects around the world. Intel rarely plays a direct role in management and usually invests about $3 million per pop.

But Intel isn’t playing Good Samaritan. The company says it hopes the investments will give its own researchers a view of the high-tech horizon and a chance to catch the next great waves of innovation. Intel’s CEO, Craig Barrett, says its venture-capital investments can bear more fruit than “putting a group of 50 [Intel] researchers into a building in these spots.” The company invests in more than semiconductor technology-including research into the Internet, communications, software and video technology.

As with its industry-leading microprocessors, Intel is a pioneer in this approach. The company is essentially extending the make-or-buy decision to research. Its tactic reflects the belief that doing all of your own research has its drawbacks. Besides the cost, there is the risk that in-house teams develop a “not invented here” syndrome.

That won’t happen to Intel, says Stephen Nachtsheim, who oversees the company’s investment program. Nachtsheim says the company wants a supplement for its own research and development, not a substitute. He lists four priorities for Intel’s investments:

Expand existing markets: Intel wants to support companies that come up with new uses for chips.

Gain new “process” expertise: The ability to make chips, which is growing harder as the chips grow smaller, increasingly distinguishes leading chip concerns from the also-rans. “By investing, we can help companies deliver these process technologies to us faster than they might otherwise,” Nachtsheim says.

Find new markets: Intel has grown phenomenally over the past 10 years, but its growth is slowing. It wants to enter hot areas outside chips.

Earn profits:With investors valuing new technology companies at record amounts, Intel expects to post profits on many of its investments. The company won’t say how much it’s earned so far, but Nachtsheim says that, as of the end of 1998, the 220 companies it had invested in were worth an estimated $2.5 billion.

Intel is in a good position to make shrewd picks in high tech. Its top managers have a commanding view of the technologies converging around information. In fact, the company’s expertise raises some danger flags for the rest of us. Like Microsoft, the company is a monopoly. As it places bets on hundreds of outside research teams, it becomes reasonable to ask whether the company will ever try to impede innovation in order to defend its lucrative turf. This is the “Octopus”
problem.

Nachtsheim says,”There are no antitrust implications” from Intel’s investments-the company never will squelch innovations that threaten to cannibalize its own products. He says the company rarely takes more than a 20 percent stake in a company or puts a representative on the company’s board. These are reasonable ways to safeguard innovation against the Octopus. Still, it would help if Intel would name all the companies that it invests in. (It won’t, citing the need to keep secrets from rivals.)

Intel is no less honest than any other major company. But honesty isn’t the issue, it’s influence. Intel is so big and rich that its venture investing creates the possibility for all kinds of conflicts.As its portfolio grows, hundreds, even thousands, of small high-tech innovators will owe Intel a favor. Without breaking any laws, they could swear a kind of allegiance to Intel, promoting its products and standards.

Even if Intel openly tells its portfolio companies not to give it favored treatment, in reality a small company may simply decide it’s best to play ball with Intel. That may mean becoming a supplier to the company at the expense of selling to Intel’s competitors. Or choosing to avoid areas that clash with Intel’s agenda. Or quietly cutting back investment in a technology that threatens Intel.

Of course, no one will admit anything like this goes on. But as the government’s antitrust case against Microsoft shows, hardball tactics are a way of life in high tech. Information technology has helped to create a New Economy based on prosperity and productivity gains, but old business practices die hard. The Octopus lives.