The iPhone XR sits between the iPhone XS (left) and an iPhone 7 Plus (right).

Above: The iPhone XR sits between the iPhone XS (left) and an iPhone 7 Plus (right).

Image Credit: Jeremy Horwitz / VentureBeat

Question: To what extent is the modem business in particular tied to Apple’s future in the modem business? They’re doing their own modem development. Are you envisioning a future where that big customer might not be there anymore, and you have to retool and realign the way that business goes forward?

Swan: One of the things we’d like you to walk away with is, 5G to drive modem volume is not the way we think about the world. 5G to drive the effectiveness and the efficiency of the network at the edge will drive lots more demand and use of data over time. We have a broad portfolio, whether it’s the cloud, whether it’s the network, whether it’s the PCs. 5G is going to drive more and more demand for the collection of capabilities we have.

In a subset of that, our belief is that with the IP that we’ve built, have been building, and will launch later this year — the IP associated with the modem will become more important. The application, the demand for that modem will not just be with one customer in one device, but with other customers, other applications, other devices. That’s where we see the optionality of what a modem means in a 5G world.

Along the way, the general rule for customers is they want the best product and the best technology. If we don’t have it in this world, and they have the capabilities, then they’re going to figure out either how to do it themselves or how to use somebody else’s. That’s competition. That’s a game that — we feel comfortable in that world. Being complacent with it will work against us, so we won’t. We’re always maybe more paranoid internally than what we read in the press about ensuring we’re building the best products. Customers will maybe entertain other ideas along the way, but they’ll always come to us because we have capabilities that are better than anything else in the world.


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We’ll deal with consequences along the way, but to go back to my first point, this isn’t about the modem. It’s a piece, but in our minds it’s a much bigger play for the collection of capabilities that we offer.

Question: You mentioned that you’d be launching to customers later this year. Do you mean a discrete modem in a phone later this year, or do you mean other products that are not that discrete modem?

Rivera: Both, actually. We’re focused on the different devices that we talked about. Gateways are being announced this week, CPE devices, devices that we expect in terms of always-connected PCs, as well as some of the opportunities that we have in smart industrial types of applications. We see a lot of opportunity in all of the trials that we’ve done over the last couple of years, and those products will start coming to market later this year and ramping up into next year.

Question: To be absolutely clear, will there be a discrete modem in a phone that will come to this market this year for sale to consumers? Or are you going to start sampling it to customers?

Rivera: We’ll be sampling, and we’ll see products in the market in 2020 with our modem.

Bob Swan is the 7th CEO of Intel.

Above: Bob Swan is the 7th CEO of Intel.

Image Credit: Intel

Question: On the licensing of 5G modem IP, as you may have seen, the licensing models that exist around that have been under a bit of a challenge lately. If this is really a big revenue opportunity, how are you going to do it differently than other California chip design companies do it, so as not to run into some of those same challenges that have happened?

Swan: Our model relative to other California-based players is just completely different. We monetize, in today’s world, the sale of that hardware, and the value that hardware plays within the device it goes into. Ours is not a licensing-based model. Royalty streams that are charged against the cost of the entire device, that’s a model that, as you know, has caused quite a bit of friction in the market. Friction for others is opportunities for us, is kind of how we look at it. Our approach has been completely different. It’s a little more challenging, but it’s different.

Question: What is the plan to monetize the IP, then? Is it flat licensing fees, or another structure?

Swan: It’s going to depend on the use case. The expectation and the belief in broader-based adoption of a variety of applications — depending on how that modem would be used in the device, whatever the device is, our expectation is it’s going to evolve quite a bit. We’re going to be flexible so that it meets the needs of the evolving customer base and meets the desires of our shareholders. We’re going to evolve how this thing plays out in a 5G world.

Question: You mentioned paranoia. I was interested in talking about what it’s like to be CEO, and whether paranoia is still a good way to govern Intel.

Swan: When you’re trying to lead a business, paranoia is a pretty constructive characteristic to have. No matter where you are, it’s a constructive way to think. It can be a liability when it paralyzes you, and it can be an incredible strength or an asset — am I allowed to use financial terms still? — if it’s used in a constructive way. I’d say the constructive way is a little bit of the fabric inside our company. Is the customer going to do it themselves? What are we going to do? Will we be paralyzed by it, or will we move faster to build better products so they’ll never entertain that idea?

Whether you’re running the comms business or running the FPGA business or running the company as a whole, I think we’ve used paranoia, based on our predecessors, as a real weapon and strategic advantage. We’ve used it to build the best products and the best technologies as quickly as we can. I think it’s a healthy part of the company.

Question: Only the strong assets survive?

Swan: [laughs]

Intel Nervana

Above: Intel Nervana

Image Credit: Jeremy Horowitz / VentureBeat

Question: A lot of investors and analysts have seen you being in the CEO role as a sign that the company is going to move toward a more financially rigorous view of its business. When you look at acquisitions, you’ll look very carefully at what that does to profits, the accretive value of those things. Can you articulate a bit about what your philosophy is along those lines, how you envision looking at the business itself and whether you value — the financial people say maybe you value financial stuff more than R&D stuff. Can you give us a sense of that?

Swan: First, I didn’t show up last week. I’ve been fortunate to be in the company for a couple of years, and fortunate to work with Sandra and Dan and Bryan before, and the rest of the leadership team, to carve out a strategy that we think is extremely attractive for our investors. Also, a belief that in executing that strategy, we have to be both innovative and disciplined in how we deploy our money, whether it’s organically for the products we’re developing, or inorganically through capabilities we add.

If you put numbers to that strategy, it means if we want to play in a much bigger TAM and drive many more returns, we’ll continue to invest in R&D and we’ll continue to do acquisitions. There’s no question about that. If you think about how we do that, if we’re redeploying our R&D capital toward the higher-growth data-centric collection of businesses, and we execute well, revenue grows faster and all dollars, all spending, doesn’t have to grow in line with revenue.

What we’ve been able to do over the last three years is add $12 billion in revenue on $200 million more in costs, with R&D going up $1.4 billion. That’s the equation that we’ve embarked on. As a result, our earnings have grown dramatically, and not because of Bob the CFO. It’s because the team realized that we have big ambitions. To capitalize on those, we have to execute better and faster, because we’re going into areas that weren’t necessarily our historical 90 percent share. In doing so, we make real tradeoffs. Revenue from $59 billion to $71 billion. Spending as a percentage of revenue from 36 to 29. A much broader portfolio, and what we believe is a much bigger wind at our back based on those investments. We’ve done it all by increasing R&D dramatically during that time frame.

How do you navigate that? When we do things like the Mobileye acquisition a year and a half ago, we said, “We’re going to invest in autonomous driving because we think it’s going to use our technology, our IP, in a much bigger way than people can imagine. But in doing so we’re going to make tradeoffs.” The tradeoffs are things like, security isn’t as important as it once was. We have a wonderful ICAP portfolio where we’ve monetized a series of assets that became, over time, more financial assets than strategic assets. We exited some new device businesses, like wearables. We made a series of tradeoffs to free up financial capital to invest in strategic opportunities to accelerate the rate of growth of the business and allow us to transform from a PC-centric company to a data-centric company and evolve the definition of what Intel Inside means.

That’s the journey we’ve been on for a few years. We’re going to be extremely disciplined in how we do that. Not to cut off our nose to spite our face, but to execute against our opportunities. Doing 15 things great is hard. Deciphering the five things that are of critical importance and doing them great, and then really deciphering whether the next 10 are of real critical value, that’s the challenge we’ve been on. Getting comfortable stopping stuff, knowing we’re not going to get everything right, being able to say, “We gave it a shot. It didn’t work. Let’s get on with it and move on.” That’s what the team has been doing over the course of the last several years. That will continue.

To capitalize on the opportunities, we don’t want to get too distracted by doing a gazillion things, but we don’t want to be so penny wise and pound foolish that we’re not investing for the future. I think we have a reasonably good balance on that now. Investors are hoping that we’re going to be better and better. Again, year 48, year 49, year 50, record years. Much bigger market than we’ve ever had in the history of the company. Dramatically redeployed how we’re spending that money. It’s a bigger and bigger opportunity to have more growth. We’re just really scrutinizing every other nickel or euro or yen we spend so we don’t have to grow those in line with revenue. That’s what we’ve been doing as a team.

Intel Gen11 has advanced features like foveated rendering, where the peripheral parts of an image are fuzzy in the name of better performance.

Above: Intel Gen11 has advanced features like foveated rendering, where the peripheral parts of an image are fuzzy in the name of better performance.

Image Credit: Dean Takahashi

Question: Can you relate that to your three stages of investor grief, or whatever it was you described? Or one stage of investor grief and two stages of delight. You have this bigger pond and you’re throwing a few rocks into it. People are asking, “Well, now what?” You talked about modem, where you are in modem, but what about these other things? How can you phrase these investments and explain where you are and when you’re going to get the returns? Are these up-front investments in mode, for example? Are these things you expect to continue?

Swan: I would characterize big bets that we’ve made to expand our TAM, just to use our internal vernacular a bit. The big bets have been memory, modem, and Mobileye. I’ll take Mobileye off the table for a second, because it’s a great investment. We’re extremely excited. It’s in the notes this morning as accretive to earnings. We think we have a gem of a business that’s doing wonderful things on its own and pulling Intel’s technology so we’ll be a leader in autonomous driving. It’s growing like a weed and it’s making a bunch of money. I don’t get many questions on that anymore. We did when we made the acquisition, but I think the questions we get under the big bet umbrella are modem, which we talked about, and memory.

On memory, there are a few things we think are relatively important. With more and more capabilities of compute — enhanced processing, enhanced analytics, AI functionality built into the processing capabilities — over time, memory can be a constraint on all the incremental power you get from the CPU. We’ve thought that unless there’s disruptive memory, being able to capitalize on all this additional compute is not going to be worth it.

We’ve made investment in memory in two ways. It’s not in what we characterize as the commodity aspects of the business. It’s in the technology that’s more disruptive on two fronts. One, leveraging our process capabilities, manufacturing capabilities, and Moore’s Law to use a process technology called floating gate, which basically means, economically, that we can get more output per dollar of input in the 3D NAND world. Floating gate stacking technology allows us, we believe, to get cost per gigabyte because of technology, not because of lower price in the 3D NAND world. It’s disruptive technology, leveraging Moore’s Law capabilities over time.

That part of the business has scaled extremely well. It’s been profitable for the last couple of years. But we’ve been reinvesting that 3D NAND profit from leading process technologies into Optane. Optane, in our mind, is a differentiating technology that will keep pace with the innovations on the CPU, so memory doesn’t become a constraint on CPU performance. That’s been a fairly significant investment. It continues to be one.

We’re rolling out a product — the Optane technology is appropriate for both the datacenter and the CPU, but we’re primarily doing it for the datacenter world and the workloads that particularly the cloud guys have to deal with. We launched a product at the end of last year that we call Cascade Lake that leverages CPU and Optane technology. That’s at very early stages, but the belief is world-class process capability on 3D NAND to drive as good economics as we can at lower invested capital, and using that money to invest in Optane that enhances our capabilities for inside the datacenter. These are not my words, but we’ve been in the investment stage, the high-anxiety stage of that for the last couple of years with the investor community. That makes them a little bit anxious.

One thing we did over the course of 2017 and 2018 is we think we have something special, disruptive technology, in a commodity-oriented world. Rather than using our investors’ money to build out our facility in China, we went and asked our customers: “We’d like to use your money.” For us, it was a bit of a test. Maybe the intersection of brilliant technologists and financial people — hey, if it’s so good, why do I have to go out and ask investors if we can use their money? Why don’t you ask customers?

To make a long story short, we’ve gotten what we call strategic supply agreements, where customers gave us $3 billion between 2017 and 2018 that was used to help build out the capacity in Dalian. That’s technology as a differentiator, both manufacturing technology and enhancing the role we play in the datacenter world. Then using our customers’ money to fund the earlier stages of the development, so it’s not as painful for shareholders. We got to a decent balance in the early stages of the otherwise painful path of significant up-front capital for long-term returns.

Above: Intel’s new hyperfast Optane 900P SSD storage.

Image Credit: Intel

Question: The general sense now is that you’re still very sub-scale, and therefore this investment phase is going to be quite an intense one for a long period of time. Obviously, the NAND market will do what the NAND market does. Looking ahead over the next three years, what is that investment cycle going to be like in memory?

Swan: The difference over the next couple of years versus the past is we have returns coming in. Before, we had losses and capital and scaling. Now we have, in essence, what we said on 2019. We haven’t really commented beyond that. We have sufficient capacity in NAND to grow into, but we need to build some self-sufficiency for our Optane product, because we’re going it alone, as opposed to sharing a facility with Micron. Beyond that, it’ll be a function of the adoption of our products by customers and our ability to continue to make them.

Rivera: We see a high level of interest and anticipation on Cascade Lake with Optane persistent memory for large in-memory database types of applications, which are not just about the cloud service provider, but clearly about our enterprise customers, as well. With 5G and with moving that compute closer to the endpoints, building out of those edge platforms, we see applications for video streaming, for cloud gaming, for a lot of content caching that will happen with that persistent memory with Cascade Lake on those platforms.

All these use cases that either economically couldn’t be delivered before — or from a technology and performance capability you can think about cloud gaming, or you can think about virtualized CDNs. That is a growth opportunity that demands high bandwidth, low latency, the ability to cache and store content much closer to the endpoint. That really is enabled by 5G. We’re harvesting a lot of those investments, even in areas where historically you wouldn’t think about where we could use that kind of capability. Our customers are pretty excited about the new things they’ll be able to do with the combination of the transformation of the network, 5G, and then disruptive technology like Cascade Lake with persistent memory.

Question: Do you have a similar justification to Optane for investing in a standalone (graphics processing unit) GPU?

Swan: Similar in that we see a real demand in a big and growing market, both PC and datacenter. With differentiating technology, we can make money. So yes, similar. The market opportunity, we think we can build some differentiated technology by leveraging — rather than just doing new … how do we use some of the technology we built for integrated graphics and pull that into a discrete offering, so the capital investment isn’t as great? We’re not going into a green field. The market is relatively big. We think we can make good money. Those three criteria — what’s similar? Obviously memory and GPUs are different customers, different dynamics. But the consistent themes are those three.

Question: On the Dalian customer financing, that $3 billion, how much was from Chinese customers? Separately, how much incentive money did you get from the Chinese government? And on both of those, how much, if any, of that is at risk going forward, given the trade situation?

Swan: On the first question, we have several strategic supply agreements. They give us their money and they commit to demand. That lowers our up-front capital and lowers our beta. But we haven’t said where that money comes from. The range of customers, we haven’t really defined that.

In Dalian, or in China, for the building of the fab, the incentives come in, generically, two ways. One is rebates as we build out the facilities. We’ve talked about that. I don’t remember the number. But it comes in chunks in the early stages of development. We had one of those chunks coming in Q2 or Q3 of last year. Those will run out rather quickly, so they can’t get those back. We’ve secured those. The second form of incentives is more tax-oriented going forward. That becomes a function of the amount of volume we put through the fab.

On the ability to withdraw the tax incentives, there’s real mutual interest for tax incentives to continue. I don’t see that as, frankly, an issue. I think the issue is more — to the extent that the powers that be conclude tariffs make any sense at all in leveling the playing field, if you have product coming from China that has higher tariffs on it, all else being equal, prices go up in the market. The good news is, lots of the supply comes from China, so everybody will be impacted by tariffs. The bad news is, it’s not good for global trade.

We’ve earned the tax incentives that are a part of all of our — whether it’s Israel or Ireland or China — that’s a natural construct of what we look for in terms of economic advantages for putting high-paying jobs and a lot of capital into these locations. There’s mutual benefit for that. I don’t see any risk. The risk is more when you start to put tariffs on product coming from some places in the world versus others. We’ll see.

We’re in the midst of what we believe is an extremely exciting transformation, from a PC-centric to a data-centric company. We have the biggest TAM we’ve had in the history of the company. We’ve set three record years of financial performance. We play an increasing role in the success of our customers because we have a more diverse set of technologies and IP to help them grow their respective businesses or enhance their capabilities. We really believe that 5G is a transformative technology that impacts not whether modem makes money or not — but even more, impacts, ultimately, the increasing demand for data.

With increasing demand for data, whether it’s what we do in the cloud — increasingly the role that Sandra and Dan and their teams play in the network and what we do at the edge, we just characterize as 5G, as the tailwind across the entire TAM, not just slices of the TAM. We’re pretty excited about the laundry list of things we’ll talk about next week.

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