As Chip Rivalry Became Fight for Dominance, Gloves Came Off
After seven years at Intel Corp., software engineer Steve Lindsay found it hard to resist the overtures from Broadcom Corp.
The 30-year-old was a chief software architect for Intel’s high-speed communications group--an increasingly important arena for the world’s largest chip maker.
Despite some successes, Lindsay had become frustrated by his unit’s inability to create a chip necessary to run some of the highest-speed networks. Broadcom already had introduced the elusive semiconductor.
But on the day Lindsay left Intel’s big operations in Portland, Ore., for Irvine in March, he learned that Intel was suing Broadcom to block him and some others from switching allegiances. Embittered, Lindsay made the move anyway.
That March lawsuit was the first public airing of what has become an escalating battle between the decades-old behemoth and an upstart rival that early on was nurtured by Intel. Since then, the two companies have traded a barrage of accusations involving trade secrets, top engineering talent and corporate skulduggery.
Broadcom alleges that Intel has been surreptitiously using a misappropriated Broadcom chip in product demonstrations, attempting to mislead potential customers into believing that the technology was Intel’s--a claim Intel denies.
A hearing in the case is scheduled for Tuesday in Superior Court in Santa Clara County, Calif. A separate patent infringement lawsuit that Intel filed against Broadcom in August is just beginning in Federal Court in Delaware.
“It is a grudge match between them,” said Charles Glavin, an analyst at Credit Suisse First Boston.
The stakes are high, as is the explosive demand for high-speed communications products and services. Forrester Research predicts 191 million devices will connect via broadband by 2005. Nearly 5 million homes have broadband access in the United States already. According to Forrester, that number will near 47 million in five years.
Broadcom wants to dominate the high-speed Internet communications chip market, just as Intel has long controlled the microprocessors that run personal computers. Although it is just 2 years old as a public company and still a fraction of Intel’s size, Broadcom’s sales growth has exceeded even Intel’s phenomenal rate of growth early on. Using its highflying stock, Broadcom has bought 15 companies in a bid to reach every facet of the broadband networking market--from the wide networks that connect metropolitan areas to one another, to the cable modems and digital TV set-top boxes found in the home. Broadcom’s sales are expected to double to more than $1 billion this year; its shares closed Friday at $222.38, up 63% for the year.
Intel also has been staking out a position in this booming field in the hopes of offsetting slowing sales of its vaunted Pentium and Celeron microprocessor chips. Intel has quietly bought a slew of companies to boost its high-speed networking unit, including the March 1999 acquisition of Sacramento-based Level One Communications Inc., a Broadcom rival, for $2.2 billion. Intel’s stock, at $45.94 on Friday, is up 12% for the year, but down 46% since September.
The urgent shortage of sophisticated engineers in the nation’s labor market has only added to the stakes. Observers say Intel’s highly publicized recent struggles to stay on top of the microprocessor market provide a nuanced backdrop for its battles with the smaller, leaner Broadcom--in the courtroom and the marketplace.
And that intense rivalry has not been lost on either side.
Henry T. Nicholas III, Broadcom’s unabashedly competitive chief executive, blasted Intel publicly after the Santa Clara-based company filed the patent suit. And at a private Halloween bash in his Laguna Niguel mansion, the decor included a tombstone marked with the names of a few staunch rivals. Intel was at the very top of the list.
Nicholas, Broadcom co-founder Henry Samueli and senior executives at Intel declined to be interviewed for this story. Intel spokesman Chuck Malloy said little more than that the company’s sole interest in the case is to protect its proprietary technologies.
But Broadcom and Intel have shared a sense of rivalry since long before the recent conflicts. And court records and interviews with current and former employees and lawyers for both sides show how these two firms, which once worked hand in hand, ended up on the collision path.
Before Broadcom’s stellar 1998 public stock offering, when the company was just a handful of engineers renting space in an office building on Wilshire Boulevard in Los Angeles, Intel saw its promise. In fact, the giant chip maker was an early investor in Broadcom, which was founded in 1991, and the fledgling company developed custom products for Intel.
But Broadcom’s early triumph in developing products was both impressive and somewhat of an affront to Intel, according to some former employees.
“I think it became evident very quickly that [Broadcom] had solved problems or challenges in integrated circuits that people had previously thought were a ways off,” said Stephen G.T. Maine, former senior director of new-business development for Broadcom. “That was something that really flayed people on the outside.”
“There was a lot of interest by Intel in being in that space,” said Maine, now chief technologist for Sensory Science Corp. in Scottsdale, Ariz.
Intel’s original approach was to acquire a stake in Broadcom, a common strategy for large technology companies that want to be able to observe their potential competitors up close. But when Intel tried to deepen its holdings in the young company, Broadcom founders resisted selling off their autonomy.
It was after the IPO, however, that the cordial rivalry diminished. As Maine put it, “Post-IPO, it became serious. Intel started bringing out new chips . . . and finding out that customers had already gone to Broadcom.”
Intel was long used to leveraging its enormous market strength to call the shots with its customers, but in this new emerging networking market, it was clearly behind.
“This is really the first time in probably 20 years that they’ve had to come in to a market cold, where their customers are not really familiar with their products,” said analyst Linley Gwennap of Mountain View, Calif., about Intel’s networking equipment experiment.
In May 1999, Broadcom introduced the same elusive chip that so frustrated Lindsay, the engineer, when he was at Intel. Intel attempted to buy the chip from Broadcom before negotiations broke down.
Intel has spent billions of dollars trying to gain headway in the networking equipment arena. So far, analysts say, the investments have not paid off. “They’ve had almost no success in their [networking] products up to this point,” said Mike Paxton of Cahners In-Stat Group.
The strains deepened as Intel’s so-called gigabit Ethernet technology team--which is at the heart of its lawsuit against Broadcom--lost at least half a dozen of its top engineers in the last year or so, to Broadcom and elsewhere. Most asked to remain anonymous, concerned about incurring Intel’s legal wrath if they drew attention to themselves.
“We think Intel has an attrition problem,” said Glavin, the Credit Suisse analyst. He asked rhetorically, “If you’re a hot engineer, do you want to work at Intel, where you’re basically a subsidiary of their microprocessor company,” or a place like Broadcom, where communications chips are its central mission?
California law clearly favors an employee’s right to change jobs at will. But the question of whether a worker can be prevented from taking a job based on the threat that he or she will expose a former employer’s trade secrets remains unresolved by the courts.
It was in March that Intel engineer Brad Gunther asked Nicholas whether there were any jobs open at Broadcom. Over chocolate Martinis--which Nicholas prepared--he engaged Gunther in a debate about competing industry standards in order to test his smarts. “I was trying to find a reason to hire him,” Nicholas said, according to the public portions of Nicholas’ testimony from a hearing in May. He arranged for Gunther to interview at Broadcom but didn’t meet with him again.
Less than a week after their meeting, a judge in the newly filed lawsuit issued a restraining order to prevent Broadcom from misappropriating any of Intel’s trade secrets.
A day later, according to the testimony, Gunther was interviewed for a job at Broadcom by a marketing director who took detailed notes of the interview. Intel alleges that Gunther gave detailed, secret information about Intel’s products during the interview, and in e-mails to Nicholas and others at the company.
Gunther was never offered a position at Broadcom. Superior Court Judge William F. Martin ruled in May that he had found probable cause to believe that Intel trade secrets were misappropriated in the course of that interview process. The judge barred Gunther from working at Broadcom until the case is resolved, and appointed a special master to oversee Broadcom’s hiring activities. Gunther did not respond to a request for comments.
Some legal experts predict the companies’ high-stakes game of chicken will eventually end in a cross-licensing agreement, which would enable them to share intellectual property rather than fight over it.
Both sides say there will be more damning evidence against the other to come.
In the meantime, the race for dominance of the market for networking equipment semiconductors continues.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Chip Shots
Intel Corp. revenue and earnings dwarf upstart Broadcom Corp., but stock in the younger Irvine communications chip maker has shot up 65% this year. Its Santa Clara rival has gained only 12.5%. A look at each company’s stock this year:
Broadcom
Friday’s close: $222.38
Intel
Friday’s close: $45.94
*
Source: Bloomberg News
