"Destination Internet Economy"

Andrew S. Grove
Munich, Germany
September 22, 1999

DR. ANDREW S. GROVE: Good morning. What I would like to talk to you about today, principally, is the economics of e-Business or e-Commerce. I've been going around telling anybody who would listen, and some people who wouldn't listen, that there's a fundamental thesis affecting all corporations around the world. In some period of time, let's say five years, there won't be any Internet companies. There will be companies that use the Internet; all companies that will operate will use the Internet in their business operations, or they will be marginalized out of operations. This is a harsh statement, but if you really think about it retrospectively, it's exactly what happened with every modern communication technology as it was introduced historically, and I think the Internet is going to be no less of a revolutionary technology than the telegraph or the telephone was in its own time.

I would like to give you a little bit of a progress report on how we are doing, progressing, towards this statement on this slide. And I apologize for it. I do not have European data, or German data. The only data that I can illustrate this with is what is happening in the United States. This chart shows two curves, two lines, and let me call your attention to it, that this is a semilog chart. Every division represents a tenfold change in the vertical direction. The yellow line represents the gross domestic product of the United States, and it's supposed to increase 3% a year rate -- too small a rate for it to show up on a semilog chart.

The blue line represents debt portion of the gross domestic product that is handled through the medium of electronic networks, e-Business or e-Commerce. The 99 number according to the commerce department is approximately a hundred billion dollars or 1% of the total GDP. And this projection indicates that the portion of the US commerce that will be on the Internet is going to approach 10% in four years' time, in the year 2003. These are mega statistics and none of us really ever know how they are constructed and what they are made up of, but I get a certain verification of them by comparing Intel's numbers, which are a little bit closer to my knowledge and my understanding, and I have a bit more confidence in them.

This chart shows the progression of Intel's regular revenues, standard Intel products, commercial transactions with our existing customer base, that is done through the medium of the Internet. In 1997, the proportion of our revenues that came that way was precisely zero. By 1998, it was over 20%; 1999 our estimate is that it's going to be over 40%, heading towards 50%, of our total revenue being conducted that way.

Now Intel revenues are some place between 25 and 30 billion dollar rate; 40% of them are in the 12 to 15 billion dollar range. So if you go back into the previous fall and consider that, according to these statistics, the totality of US e-Commerce is a hundred billion dollars, it would suggest that Intel alone would represent 12 to 15% of that, which I really don't think is the case. And since I'm comfortable with the Intel number, I think it is probably a reasonable assumption that the commerce department statistics for the United States as a whole are probably understated rather than overstated. So it is a large, rapidly growing phenomenon, and phenomena like this only happens when there is a very, very strong driving force for them to be swept into the marketplace; and I think it is the case in this situation as well.

The rationale for e-Business is that it is attractive to buyers and sellers. It is attractive to buyers because it renders the market in every good -- in every service -- as effective or as efficient, rather, as the most efficient of all markets, which is the stock market. And increasingly you begin to see some of the methods of technical stock trading being applied to the trading of goods and services on the Internet as a further testimonial of this model spreading outside of dealing the market for financial securities to market for all kinds of goods and services. So it is attractive for buyers because it renders them more efficient and it is attractive to sellers because it brings the same kind of efficiency to the eternal operations of companies.

Now, notwithstanding markets going up and down on a daily basis, fundamental securities theories is still, in my opinion, a law that hasn't been repealed and that says that the value of any enterprise is the sum total of a discounted cash flow from today going forward into the future. I take the liberty of using the symbol, the integral symbol, to indicate summation. Basically, what it says is we add all this cash flow from today to eternity, that is what the real value, tangible value of the enterprises. The power of e-Business is that it introduces and increases and uplifts into this discounted cash flow of enterprises that use them, and it does so by -- in two different ways. It increases the value of the discounted cash flow due to external factors and due to internal factors. External factors reaching customers that you haven't reached before. Internal factors representing introducing internal operational efficiencies that you haven't been able to have before.

Let me illustrate this little formula by applying it, first of all, to an ordinary business -- a brick and mortar kind of business that -- where it applies just like it applies anywhere else. Here we have the representation of the discounted cash flow in that orange rectangle of a brick business, and if you are a manager of a big brick business, you have two ways of increasing the value of your enterprise: one is to make internal operational improvements, improvement of your production flow, improving your internal processes, increasing the discounted cash flow in the horizontal direction moving to the right; and the second one is to increase marketing efforts reaching additional customers, reaching additional markets. This is what business is about, this is what every single one of us in this room work at, no matter what kind of line of work we are in.

Recently, we have seen all over the world the appearance of companies that were born on the Internet. They are what I call the "click" companies. Click as in clicking a mouse. These click companies use the power of the Internet of reaching customers worldwide using the electronic network that's already in place. So their value is perceived to be very heavily vertical in the reach direction, but each of these businesses, as they mature and as they become more real businesses, have to concern themselves with internal operations and have to increase work in building the area under the rectangle in the operational direction to the right as well. And I'll just give you one illustration of that, that it is actually happening. According to trade information, there are something like 60 to 100 million square feet of warehousing under construction for Internet commerce all over the world and will be in place by the year 2003, which is where the 10% of GDP of the US is estimated to be on the Internet, hundred millions worth of warehousing. And just to come to the European market, Amazon.com, which is one of the more prominent click kind of companies, is in the process of building two large warehouses totaling three quarters of a million square feet of space 20 miles out of London. But as the click companies work on their Intel operation, and as the brick companies use the Internet to reach additional customers, what we are likely to see is the emergence of companies that combine the benefits of both sets of origin, both sets of legacies, with a nod toward the co-CEO of Schwab Corporation who coined the phrase, "I will call these companies ‘clicks and mortar' companies," and -- excuse me, I don't know how to do this in German -- it's a play in English of brick and mortar where we replace the brick with click and mortar company. If you are a brick company, you can approach this click and mortar state in one way. If you are a click company you can approach a click and mortar state in another direction, but in both of those cases you can avail yourself of the opportunity of increasing the area under the curve, to increase the size of the rectangle, the discounted cash flow rectangle, using both techniques. And, in my view, in some years' time, all companies are going to reach a stage, no matter what their origin is going to be. Now, this is a very, very profound change. It's a very profound change in the environment of all businesses, whether they are click origin or brick and mortar origin. And changes like this I have tended to describe as strategic inflection points, that subtle change in the curve where, depending on the action that you take to respond to the environment of change, you either bring your enterprise into a higher state of efficiency, higher state of effectiveness, a higher discounted cash flow state, or you miss your chance and you move toward a more marginalized operation. Companies small and large are affected by that, and this, most emphatically, is not a US phenomenon; it is a worldwide phenomenon, and to illustrate that, I would like to call on BMW who, with the assistance of Kabel New Media, have embraced the media in their internal operation. But first let's watch a little video adaptation of it. So let's run the video, please.

(Cue Video of BMW)

DR. ANDREW S. GROVE: Please welcome the star of the video, Wolfgang Armbrecht, head of communication and marketing services of BMW, and Peter Kabel, who is head of Kabel Media. Have a seat, gentlemen.

I would like to spend a few minutes discussing what was behind all of that with Professor Kabel. You can give us an idea. Your business is to bring technology to brands. How does that happen?

MR. KABEL: First of all, it's not technology for technology's sake. It's technology used for improving the brand experience for the customers. Brand experience could be in two parts: one, in our case, is to familiarize the customers really with our product, so we use a lot of technology, 3D, video, audio, whatever you can imagine. On the other hand, it's improved the brand experience in communication means. That means that we use technology as chat rooms and other things more. If you want to use technology in the communication part so then you have to be aware that within your organization you have to be ready to communicate, and, therefore, you also need technology, and we use technology to bring the feedback to the appropriate places within the company and then again bring the answer from BMW to the clients. But it's, as I said, about brand experience and not technology for technology sake.

DR. ANDREW S. GROVE: An interesting aspect is inside and outside or rather outside first and inside secondly.

And, Dr. Armbrecht, has this, in fact, this kind of technology, in your experience, affected something like the sales process?

MR. ARMBRECHT: Yes. I cannot agree more. It has affected a lot of the sales process. And we follow more or less your strategy. We differentiate the sales process into a pre-sales phase, sales phase and an after-sales phase. And we started with pre-sale activities - giving information to the customers. But very soon we entered a phase where we started dialogues with our customers where we receive emails, et cetera. Then the second step was to move into the after-sales area. This is an interesting tool to increase loyalty of our customers, because we give them a chance to talk, for example, with board members. There is the opportunity for all customers to talk to board members directly. So especially it's the case in the 7 series driver circle.

DR. ANDREW S. GROVE: You mentioned you started in 1995. 1995 was the Ice Age in Internet time. What gave you the impetus and the courage to get going with it as early as that?

MR. ARMBRECHT: If you look at a little bit of the history of BMW, it stands for being innovative, being dynamic and being, I would say, highly aesthetic, everything that BMW is doing. And referring to the brand value of integration, it's clear we also have interest in new technologies and we know from our customers' profiles, they love it. They like it to be, let me say, pioneers in the field of adapting new technologies. It's for us, very clear -- we did it four years ago during the Frankfurt Motor Show, which is the biggest event in our motor industry, and there we had our first Internet appearance.

DR. ANDREW S. GROVE: What portion of your customers use the Internet, according to your statistics, before they walk into the show room?

MR. ARMBRECHT: That's an interesting observation. As high as we are in our portfolio stake, the 7 series, there we have round about 60 to 70% of our customers today using the Internet. That's very interesting, and it means you can say round about all customers are linked to the Internet and especially for BMW, it's a tremendous chance.

MR. KABEL: I think to add one thing, that would be the beginning of the Ice Age, it was that these customers just wanted to see that there is something in the Internet -- that there's a presence -- and that they probably can see a picture of something up there of their car. I think this changes dramatically, and I think we can see that people really expect that they can do something in the Internet and really have some transactional parts involved, and not only the presentation, and the just seeing that there's something there. So, therefore, I think this also has something to do with the generation -- the younger the people are, the more open, definitely, they are to do some transactional things also on the Internet.

DR. ANDREW S. GROVE: Isn't there a conundrum that the younger people who are more comfortable on the web are less likely to be able to afford a 7 series BMW?

MR. KABEL: In some ways you are absolutely right -- that's right. But I think we shouldn't underestimate the 3 series, for instance. I mean, probably we do not have 70% of the people who have access, but probably 50%, so it works still.

DR. ANDREW S. GROVE: The other thing I'm thinking about is they become Internet entrepreneurs, and they become qualified buyers.

(Laughter)

MR. ARMBRECHT: That's absolutely right, and maybe you have seen the latest "Fortune" issue that we had the most wealthy people on the front page under the age of 40, and most of them are from Internet business, et cetera. But we shouldn't forget Internet started as something which is around students or so. But, in the meantime, age has increased on the Internet.

DR. ANDREW S. GROVE: It does, doesn't it?

MR. ARMBRECHT: And income as well, and that's an important fact.

DR. ANDREW S. GROVE:. Can one anticipate that the Internet is going to influence product design?

MR. ARMBRECHT: Yes, because Internet not only changes sales-related processes, it changes BMW; it changes part of the organization step by step by step due to the fact that we get feedback very, very fast on, let me say, on product. Let me take the Frankfurt Motor Show. We have a new project on a future car and within -- I would say within 24 hours -- we get feedback, not only from visitors at the shows, but visitors from around the world.

DR. ANDREW S. GROVE: You run an instant focus group on new features.

MR. ARMBRECHT: Exactly, and this gives us the opportunity to react to customer demand requirements or whatever within a very, very short time limit.

MR. KABEL: I think not only the focus group we have, but also I think the cars themselves change. They will have Internet functionality in the future where you receive the Internet direct. So I think there are a lot of ways how the Internet will change even a product like cars.

DR. ANDREW S. GROVE: I can't wait until my taxi driver is going to look at his stock price while he's getting me to the airport.

Thank you very much, gentlemen.

I would like to shift gears a little bit and talk about how to implement e-Business. We've talked until now about the ways it will benefit an existing business. I want to talk about the way any corporation by and large has to -- the steps any corporation has to go through to implement them. And, for simplicity, I would like to take this process and break it into three stages; the first phase in which the infrastructure for e-Business is put in place. The second one where the business processes that Dr. Armbrecht actually touched upon a little bit are modified to take advantage of that infrastructure. And the third one again, I heard a few comments about foreshadowing it, where we exploit the data and the feedback loops that the e-Business infrastructure generates for us. Let's take it one at a time.

The first phase, building the infrastructure, is very heavily IT-related, information technology related sort of activities. I'm going to use the Intel example because we've basically had to do the same type of things ourselves for our own e-Business. We were fortunate enough, not by planning, but in the early 90's we undertook a very major product re-engineering, revamping our back office processes, the order entry, accounts payable, accounts receivable processes by relatively modern software, which was absolutely not aware of the coming Internet, but it was relatively modern and it had the interfaces that then allowed us that in about the same time as BMW, '94, '95, we started to use the web for marketing purposes, completely independent from revamping of the back operations, was a pseudo -- the interfaces of a more modern set of systems. We were able to weld these together and bring them together and build an infrastructure for e-Commerce. That was the internal part of the job. But this system is only as useful as it allows us to encompass all the customers, dealers, trading partners that need to be part of the community that we conduct our business with. So the second phase was to build the e-Business infrastructure with our dealer channel which, in our case, is approximately 40,000 to 50,000 dealers worldwide. And when I say dealers, some from substantial companies very sophisticated in computer technology, but many of them are very small retailers, cornerstone, one-, two-, three-man operations who are -- although they build computers for their customers -- are not necessarily very sophisticated in using computers. And it was a very interesting process to go to these people, and the majority in terms of numbers were in the small category, and talk them into acquiring the necessary systems, acquiring the necessary software, getting training in them, and convince them that this is going to be good for their business, not just for ours.

It's very interesting what happened. This example pertains to our dealer infrastructure in Taiwan, which are particularly small and diversified, and we had a fair amount of persuasion. We had to go to a fair amount of persuasion to get them to join. After we got them on the web, six months later we went back there, kind of a traveling roadshow, Taiwan and Asia all together, to see how things were going, and we were bombarded by sophisticated requests by our dealer channels who have gotten so used to the Internet infrastructure, so dependent on it, that they were pushing us to add additional features that we didn't even consider in the first place. So in a short six-month period of time, we went from being the push through the doors to being the recipients of drive from the users of the dealer infrastructure who have discovered how beneficial this is to their business. That's the first phase.

We have this and additional case studies described on our web page, appropriately enough, www.intel.com/business, and I invite you to look there for further information and detail on this.

Moving on to the second phase, once we have this infrastructure in place, we need -- it's good enough, it gives us benefits as is -- but the real benefits only start coming when we realize that this infrastructure is here, is different than what we've had before, and by modifying our own non-IT business processes, our ordinary business process, the way we process orders, the way we move data around inside our company, we can really increase the benefit that comes from this technique to ourselves and our partners. Just a couple of examples. The obvious is automating the order entry process -- in our case like to have a reduction in average time from an average order from 15 minutes to three minutes, dramatic improvement that affects hundreds of people. But one that's kind of upbeat, a very interesting benefit that we did not anticipate. Once we had this network in place, we could apply it to something we never thought of applying it to. Intel, in order to help our customers build computers around their product, provides a lot of technical education, technical specifications, technical updates. For instance, you find something wrong with one of our products, we provide information about the problem and provide information how the customer can work around that problem. And consequently, it turns out that we ship around about 140,000 confidential documents -- because these are documents that only go to Intel customers -- a year. And the method through which we do that, we bind them in a book, depending on the nature of the information, the book has particular color-coded covers. And our sales engineers around the world physically deliver these books to the customers and the customers sign the receipt of it, and then when we have an update, we repeat the same process. It takes us 56 days per year to handle distribution of these 140,000 documents. Once it was networked, it was put in place for support and order entry was put in place, we realized that these documents which were created electronically in the first place before they got printed out could just as easily be printed under security protection to our customer base, to our dealer channel electronically, reducing the 56 days of very valuable sales engineering time that they use on a logistical task to almost nothing and, in the process, making sure that customers who are at distant locations -- who sometimes had to wait weeks before update information would reach them -- would receive that information simultaneously electronically as our larger customers. So clearly, a benefit to our customer base and internal benefit to ourselves.

This is the kind of adaptation that is possible to do once the infrastructure is in place. But it is not easy to do; it requires interdisciplinary work on our people's part. It's no longer an IT task; it's a task for the entire organization.

The ultimate phase that we heard a few hints from the previous case study, and I cannot really lend a great deal to it on the Intel basis, is when we use the customer information to improve our product or processes. And the prominent examples of that have been told many times is how Dell takes the incoming orders on the web. They manage their supply line while maintaining a very low inventory level. And how Amazon.com actually uses buyers' preferences to reconfigure products and packaging of products to offer for sales. This requires profound understanding of the customer through the database, very rapid and efficient ability to mine the database, not for data, but for large information that transcends the data, and this is where the next level of benefit comes after e-Business is implemented.

So we've seen that basically the implementation of the e-Business proceeds in three phases: the building of the infrastructure; the modification of the businesses that take advantage of the infrastructure; and then exploiting the data in the feedback loops later. And I gave you some examples. I'd like to give another example from a German company, and I would like to introduce, first, the company WOLF Garten through a short video about the company itself.

(Cue Video of WOLF Garten)

DR. ANDREW S. GROVE: Please welcome Gregor Wolf, CEO of WOLF Garten.

What is unusual or different about the garden supply business?

MR. GREGOR WOLF: When all the clicks and mortar companies go home and want to relax and dream about the wonderful garden that's going to grow, we feel it's our job to get the tulips to bloom, the grass to go green, and provide you with your own experience of what nature can be all about.

DR. ANDREW S. GROVE: What is the structure of the industry like?

MR. GREGOR WOLF: We have a selling period of basically 20 weeks; that's when nature is growing and when we sell our products. So with a 20-week selling product, there's fundamental challenges associated with it.

DR. ANDREW S. GROVE: Is your dealer structure wide or narrow?

MR. GREGOR WOLF: We sell through in Europe about 6,000 dealers, and you find everything from the mom and pop stores to the modern multiples DIYs, and in modern structures we need to have every channel there is available in order to meet all products.

DR. ANDREW S. GROVE: Is this customer based, this direct channel, computer savvy?

MR. GREGOR WOLF: No, they are not. The mom and pop stores which we traditionally know here, they're usually in their late 40's, early 50's, a generation passing on their store, and computers is something which is very alien to them, not something they feel comfortable with.

DR. ANDREW S. GROVE: How do you overcome that?

MR. GREGOR WOLF: We spend a lot of time with our customers and convince them of the value, educating them, getting them the hardware in the store, and talking, talking, talking to them.

DR. ANDREW S. GROVE: How has it worked?

MR. GREGOR WOLF: It's not an easy job, but some jobs are worthwhile. We currently have something like 1,500 dealers on the line, and the ones that are online, the numbers show they're significantly more successful than dealers which we didn't get on line. The primary reason for this is we're in a position to shorten the time log between when they see the sale, when we see the sale, and the time we need to replenish it and provide information to them.

DR. ANDREW S. GROVE: You have a 21-week selling season -- time must be even more important?

MR. GREGOR WOLF: Time is our lifeline. To us, out of stock is out of business, and in stock is out of money. So we currently -- we currently have the attitude to ship within 24 hours after order entry.

DR. ANDREW S. GROVE: You said you have 6,000 dealers and about 1,200 of them online, so you're about 20% conversion. How hard has it been?

MR. GREGOR WOLF: It has been very hard. The easiest part was getting on the net, saying listen, I want to have the pretty pictures up and running. That was easy. The real difficulty and challenging part is the organization behind it. When you go on the web, and you give transparency on the stock levels which you have, you make the whole organization transparent to everyone who wants to see it; they see immediately can they ship, are they in stock, are they performing to a service level? And in three months after we went online, we looked at our numbers and evaluated what we had done, and we said we have an issue to the dealer here, and the issue being that business is so demanding and so challenging with the current organization we cannot do that -- we need to reorganize and revamp the entire organization based on speed and based on process re-engineering. And it led to us giving our management the task to re-engineer every single process in the company.

DR. ANDREW S. GROVE: That's a Phase 2?

MR. GREGOR WOLF: That's a Phase 2, within 9 months, which we're just currently completing. And reinventing the wheel and putting in a new structure.

DR. ANDREW S. GROVE: How much hair did you lose over it?

MR. GREGOR WOLF: Quite a bit. I couldn't get my curlers in this morning. It's a lot of time. Our managers on every single level spend one day a week currently.

DR. ANDREW S. GROVE: One day a week on the adaptation of the Internet?

MR. GREGOR WOLF: On the adaptation of the processes, and our top management, about two days a week, ensuring that speed, consistency in message, and the value which we can generate in it gets passed on to our customers.

DR. ANDREW S. GROVE: Given what you know today, are you committed to continue?

MR. GREGOR WOLF: There's no other alternative. It's a wonderful tool. It's an opportunity like we've been dreaming of for many years. We can talk to you directly. We've been able to generate two new products out of the selling site. We heard from our consumers, for example. We find that regeneration of the law is very cumbersome -- you need to have spreader, fertilizing seed. With that feedback into our organization, we've introduced a new product six weeks ago which allows you to have combination, a little technology, running a piece of paper, cutting it up and the process is finished. And we see that with the feedback loops which the Internet provides us with, one, we can be quicker, more cost-effective and create a lot more value when it comes to new product, new services. There's no option to us for the 20 weeks.

DR. ANDREW S. GROVE: You're basically starting on Phase 3. You haven't even gotten out of Phase 2.

MR. GREGOR WOLF: We feel that Phase 2 will not end. It's ongoing. What we felt was right for a process level six months ago, and if you match it today with the demands we have on the dealers' side, Phase 2 is a never-ending story.

DR. ANDREW S. GROVE: Gregor, thank you very much.

I really appreciate Mr. Wolf's frankness about it, but the reality is exactly the way he described it. You will probably read the good side of these stories and rarely will you find businessmen that will stand up in front of you and tell you what a hard job it is, not so much putting the infrastructure in place because other people do that for you, but adapting your own businesses to take advantage -- but that is where the gain is.

With that, I would like to go and finish up by saying a few words on Intel's role in all of this. Our previous role has been -- we define ourselves to be the building block supplier to the new computer industry. New computer industry over the last 15 years consisted of personal computing, and as all these phenomenon -- as the phenomenon of the Internet and e-Business is upon us -- we had to redefine our playing field to that being the Internet economy. So our commission now is to be the building block supplier to the Internet economy. These are fancy words; they may or may not be meaningful to you. But I would like to give you a couple of visual illustrations of what they really mean. One way I'm going to do that is I'm going to play a six-year old television commercial that we introduce the -- actually that's one of our first television customers that we told our story to around the time, 1993, when the Pentium® Processor was being introduced into the marketplace. So let's roll that video. Think of our commission, the building block supplier to the PC industry.

(Cue Video of Intel Commercial)

DR. ANDREW S. GROVE: Well, things have gotten a little more complicated with the Internet, and I cannot sum up, that is not yet, our role as building block supplier to the Internet economy in a 30-second video segment, so I'm going to do a computer animation and take you through the corresponding process of what happens when you hit the enter key. Imagine you're at home sitting in front of the computer, and you do something like go out to the web and download a piece of music using MP3 compression techniques. So what happens after you hit the return key? I'm sure you all have your own ideas on it, but I would like to take you on a journey of what actually happens. Your computer takes that information that comes from your activating the return key, generates a number of packets, each of which are messages. The messages leave your computer on the telephone wire and go to an Internet service provider. Some things happen to it there, then they go out on the Internet backbone to the place where that magical music is stored and fetch the music -- that's the very brief version. It's a little bit slower. Let's take it step by step and take a look at what happens after we begin that transaction and begin to send the request to the website.

Again, what happens is our request is broken into a bunch of digital packets; they come out of the microprocessor, they begin travelling first through the computer, then they leave the computer, and, through the telephone wire, leave the house and go to an Internet service provider some place in your neighborhood. Now, what happens inside the Internet service provider, we can only see by opening up the walls and taking a look inside. And the packets have to be entered -- after they enter, they enter a variety of server computers that contain a number of microprocessors themselves. The information gets first prepared, then it gets sent to the right place and the information as it left your desktop computer has the equivalent of the postal code printed on the packets before we send them off to the wide world of the Internet. Then a computer has to figure out the right way, most efficient way, to send it, and then a router has to actually implement that instruction. When this has been done, the data begins to travel -- traverse the Internet backbone. These are all the billions of dollars of cable that people are laying by thousands and thousands of miles. They go to an access point where they enter the access cable. The packets get routed in different directions, but they head off to the ultimate place where a bunch of bit computers are usually stored. They enter there. The information gets processed again, they go to an application server, a big computer where microprocessors find the music as a result of the request. The little bits that come in, find the blue bits, which is the music that you're looking for, and the blue bits leave the web server and begin the journey back home and with that, the result of your request, the music itself, begins a journey back through the Internet backbone, through the access point, back to the Internet service provider, and from the Internet service provider, through the telephone wire to your home. As you can see a typical -- this process that we talked through would usually take 4-odd milliseconds, about half a second. I wish I could illustrate this in real-time but the whole thing would be a blur. I'm going to take you through this whole series a little bit faster without talking and distracting you. I'm going to do it 80 times slower than real life. So go for the ride.

(Cue Fast DVD Simulation)

DR. ANDREW S. GROVE: This is what happens every time you hit the return key. Back to that, our mission is to supply silicon chips wherever the bit stream does anything significant or intelligent. We supply microprocessors for the clients, desktop clients that make up around 90% of all the Internet access devices today. We supply silicon chips, different types, more complex silicon chips, for many of the server computers that you saw there. And we supply increasing silicon chips that direct and shape the data flow and guide the movements of those packets. The last several years we have embarked on a series of acquisitions; we have bought seven different companies to enhance our capabilities to provide networking intelligence to our silicon technology. That process of acquiring the capabilities will increase -- will continue on as the importance of communications in silicon processing, in the function of our silicon -- continues to be as important as that.

Now, recently we have indicated that we are also realizing that as companies that are not as large as major banks, major institutions, but companies like WOLF Garten or even smaller than WOLF Garten everywhere, require capabilities that we described here. They often would prefer to get those capabilities in the form of service rather than in the form of product, because to acquire them as a product requires oddly significant capital and expense items in terms of managing the capability in-house. So, more recently, we announced our intention to provide to those collection servers things like you see in the web server farm at the end of that animation, as a service product, and we will provide this in the form of both the raw power, the muscle, the capability of lots and lots of servers that companies, particularly small companies, can rent. And recognizing that as the predominant user of the Internet is going from marketing documents to live blood, order entry, product information, mission critical information, these server farms need to be managed in an electronic sense and, correspondingly, we are putting very sophisticated control infrastructures, redundance or management of redundancies, into it in a state-of-the-art fashion, basically bringing the same level of sophistication that we bring to the internal Intel e-Business, and it may be available for small businesses.

A major development that we have taken in the last several years is developing a microprocessor that is particularly significant and promises to be a very important part of our building block scenario. We like to think of this as the image of the Phase 3 part of the e-Business, and that's our IA-64 bit intellectual product line. We've introduced and we're likely to introduce the product in the year 2000. The significance of this is that by going to 64 bits, we are able to access and manipulate large databases in memory corresponding to the needs of the phase of the infrastructure. We are able to accelerate the security computation of processing on chip, and we are able to accelerate the visualization that's necessary to deal with database so that information comes out of databases rather than data.

I happen to have an early sample of that. This is what the product looks like -- prototype of what the product looks like -- which is the most complex silicon product that we've ever produced and, at the moment, it's capable of booting up quite a bit of software. It's in pretty good shape.

We are in the very early stage of deployment of everything that I showed you. And you may think that given that things are progressing so fast, we are further along than you might think or than we are, actually, when you make a comparison and look at the base of servers as a measure of the infrastructure that's in that cloud that we traveled through, the bit stream, and you compare what that infrastructure is going to look like five years from now, you can anticipate, mathematically can project, a great deal of growth in that infrastructure. The left bar represents our estimate of the server install base today. The right bar, take that install base, adjust for the probable increase in population that access the Internet every time a personal computer is sold, one more client gets on the Internet. The increasing use of diverse services, not just one but multiple services. The increasing complexity you heard Professor Kabel talk about, multimedia and animation and the like to enhance the data and turn it into more easily digestible information. And lastly, because of the critical nature of e-Business, a certain amount of redundancy has to be built in. When you make this computation you come to the conclusion that 96% of the total capacity that needs to be up in the year 2005 is still to be deployed. So we are looking at a very, very major infrastructure building exercise, not just in the telecommunications, but in the infrastructure that makes up the Internet.

I would just like to end by reiterating really the major point that I want to leave you with. I think embracing your business operation and all of our business operations is not an option, it's a mandate. And I think probably all of us, at a certain level, understand that and internalize it. The process of getting there is an arduous process. I described them in those three phases. And the critical message I would like to leave you with: Phase 1, you can buy; you can buy from consulting companies, you can buy from computing companies, you can buy from communication companies, you can buy from system integrators. If you wish, they say that it's only a matter of money. Phase 2, nobody can do for you. Phase 2, we each have to do for our own enterprises. And as you heard a little bit from and even more elegantly from Mr. Wolf, it is a very difficult task. And I hope that if I can leave you with one assignment, you go back and rethink whether you put enough energy, enough passion, and enough effort into the necessary process and organizational changes that are necessary to harvest the investment that you're undoubtedly to make in Phase 1 so you get the benefit.

So thank you very much for listening to me. I have time for maybe three or four questions, and I'll be glad to answer them before we move on to the rest of the program.

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