There are many reasons why I believe Intel is past its prime. To keep it simple: the company has a monopoly that can't realistically get any better, and this monopoly will likely end one way or another. Shareholders seem blissfully unaware of this.

As it happens, my family has witnessed some of the greatest monopolies of our time. My mother's father worked at the Ford Rouge plant. They would ship raw iron ore in one end and drive cars out the other. At one point Ford controlled nearly 90% of the world market for cars. This power allowed Ford to build bigger and bigger plants that no one else could afford to build. By the mid-thirties, however, GM surpassed Ford anyway. Ford was hit again years later by foreign competition.

In the 1940s railroad stocks were a second index, much as the Nasdaq is today. My father's father, J.R. Palardy, was the stationmaster in St. Jerome, Quebec at that time. This made him the most powerful man in town. His loss of power was swift and profound. The tracks that run by his house are still used, but are now dependent on government aid. The power of the railroads evaporated once the rails lost their monopoly. The competition for the railroads was not from other railroads but from newer alternatives, and you can't blame the management of the railroads for their decline.

Like Ford, Intel's near-term competition will, of course, come from companies in the same market. These companies have already forced Intel to cut prices more than Intel had planned. More interesting to me is that -- like the railroads -- Intel's future competition will come from alternatives that appeal more to customers than the traditional Personal Computer (PC).

It's hard to say exactly what will begin to unseat Intel, but I believe set-top boxes could do it within two and a half years. These boxes have chips made by a variety of companies and they offer a variety of features. As they are given away by cable, phone or satellite dish companies, customers will be offered an alternative to owning a PC.

About 90% of AOL users use the Internet for e-mail and chat, so a set-top box will be as good for them as Intel's fastest chip. These boxes are designed primarily for video, so they will be superior to any of Intel's chips in that important application. They may also be superior for applications such as games. (Did you hear the price on the 64 bit Sony Playstation is dropping to $99?) Set-top boxes will also steal many of Intel's new markets in middle- to lower-income groups and in foreign countries. Intel may also make chips for these boxes, but it will not have a monopoly. These boxes will cause Intel's home PC market to shrink back to its roots of home businesses and semi-professionals.

Businesses may continue to use PCs, but they will cut back on computer costs compared to what they have spent in the past. Network computers, which would be like a set-top box for the office, may not use Intel chips. The presence of a good number of non-Intel computers in offices would break Intel's monopoly.

Intel bulls reassure themselves by pointing out that Intel's PE is not that high, but that won't mean much if Intel loses its monopoly. Prices will fall through the floor, and it may take several years for Intel to get back in the black. Like nearly all tech stocks, Intel is volatile, cyclical, and unpredictable. The perfect time to sell is often the moment when everything for the future seems perfect -- which was early this year.

-- Frank Palardy ([email protected])

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