Through a category design lens, the American people should temper any excitement about their new 10% stake in Intel. 

That is, unless Intel is about to create an entirely new category of computing power – which seems unlikely.

Intel’s Rise as a Category Leader

Let’s first rewind. 

For a brief period in 1999, Intel was the most valuable company in the U.S., worth $503 billion at its peak. You could cite lots of reasons for Intel’s success. It was supremely well managed by one of the great CEOs in tech history, Andy Grove. It led the world in high-tech chip manufacturing capabilities. It had developed a powerful brand – remember “Intel Inside”?

But Intel’s superpower really came down to one thing: it created, developed, and then dominated an important market category, the personal computer microprocessor. 

Intel introduced the first commercial microprocessor in 1971 (the Intel 4004). The company evangelized microprocessors as an engine for anything that had to do calculations, whether high-end mathematical calculators or, a bit later, PCs, opening up a new category of product and stirring demand for that product. 

In the late 1970s, most early PCs were built with Intel’s microprocessors at their core. In 1981, IBM introduced its PC, which ran on Intel’s chip and Microsoft’s operating system. By securing its place at the core of IBM’s PCs, Intel became the dominant design for microprocessors. Computer buyers, most of whom knew nothing about the insides of computers, demanded Intel chips and would pay a premium for PCs that used them.

As the market for PCs exploded in the 1980s and ‘90s, it carried Intel along with it. Buyers could choose from just two kinds of computers: PCs based on Intel chips and Microsoft Windows, or PCs from Apple, which relied on chips from Motorola and Apple’s own operating system. 

In 1990, Apple’s share of the PC market was about 9%. Intel-based PCs made up almost all of the other 91%. (Apple actually made a shift to Intel chips in 2006. And then, as another sign of Intel’s decline, by 2023 Apple had completely stopped making Intel-based computers.)

So Intel was a classic story of a category winner. It followed the path predicted by economist Paul Geroski, who laid out an elegant theory of how categories behave. Ultimately, as Geroski’s model shows, a dominating winner like Intel reaps enormous rewards, taking in most of the category’s economics. Intel’s stock zoomed because investors believed it would continue to dominate and profit from a surging category.

The Category Curve Turns Against Intel

Intel’s problem now is that its category has been usurped by new categories of computing processors. 

First, its category of PC microprocessors started to get eaten by mobile device microprocessors. Intel dominated in PCs, but couldn’t compete in the new category for mobile gadgets.

Now there’s NVIDIA, making yet another completely different category of microprocessor for AI. NVIDIA didn’t bury Intel by competing in Intel’s category – it buried Intel by creating a new category that now matters more than Intel’s old category. Providing chips for PCs today is a mature and unexciting business, even if still necessary. It’s like being in the business of making automobile parts or microwave ovens.

NVIDIA has won the dominant design of a rocketing category, which is why the company is worth more than $4 trillion. If Intel’s plan is to enter NVIDIA’s category, Intel’s fate at best will be as a second-tier player that’s always following NVIDIA and has little pricing power. 

Dominant design winners rarely lose out to a newcomer. NVIDIA is not likely to lose its category, or even much market share, to Intel.

The Hard Road Ahead

If Intel wants to be exciting again – to really matter again; to see investors rush to buy its stock again – it will have to create, develop and win a new category of computing processor. 

Intel would have to leapfrog NVIDIA to whatever will come next. It can’t just be a faster or cheaper AI chip. It will have to be something daring and new. (Quantum computing? Oh, wait. Intel rival AMD just announced it’s going to do that in a partnership with IBM.)

Daring and new is usually a challenge for a long-established public company like Intel. It means funneling resources away from products that make money now and pushing those resources into products that may not make money for quite a while. 

If earnings tumble because of it, stockholders will bail. They’re not going to wait and hope for a payoff. (Clayton Christensen’s The Innovator’s Dilemma beautifully describes the dynamic Intel faces.)

So, from a category design viewpoint, Intel is between a rock and hard place. It dominates a mature and fading category, and its fate is tied to that category. Intel might do OK entering NVIDIA’s category, but most likely that means expending enormous resources to scratch out a small share of someone else’s market. 

Or Intel can take a wild chance on creating a new category that may not pay off for years, if ever. Big companies almost never take those kinds of chances…or succeed at it if they do.

The lesson here: a company does not stand alone. It is always tied to a market category. The state of the category is as important – sometimes more important – than the state of the company leading it. Markets don’t only reward companies, they reward categories.

Our 10% stake in Intel may give the company a temporary boost, but through a category design lens, a temporary boost may be the best we new shareholders can hope for.

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