SAN FRANCISCO, Aug 7 (Reuters) - For U.S. chip giant

Intel, the darling of the computer age before it fell on harder

times in the AI era, things might have been quite different.

About seven years ago, the company had the chance to buy a

stake in OpenAI, then a fledgling non-profit research

organization working in a little-known field called generative

artificial intelligence, four people with direct knowledge of

those discussions told Reuters.

Over several months in 2017 and 2018, executives at the two

companies discussed various options, including Intel buying a

15% stake for $1 billion in cash, three of the people said. They

also discussed Intel taking an additional 15% stake in OpenAI if

it made hardware for the startup at cost price, two people said.

Intel ultimately decided against a deal, partly

because then-CEO Bob Swan did not think generative AI models

would make it to market in the near future and thus repay the

chipmaker's investment, according to three of the sources, who

all requested anonymity to discuss confidential matters.

OpenAI was interested in an investment from Intel because it

would have reduced their reliance on Nvidia's ( NVDA ) chips and allowed

the startup to build its own infrastructure, two of the people

said. The deal also fell through because Intel's ( INTC ) data center

unit did not want to make products at cost, the people added.

An Intel spokesperson did not address questions about the

potential deal. Swan did not respond to a request for comment

and OpenAI declined to comment.

Intel's ( INTC ) decision not to invest in OpenAI, which went on to

launch the groundbreaking ChatGPT in 2022 and is now reportedly

valued at about $80 billion, has not previously been made

public.

It is among a series of strategic misfortunes that have seen

the company, which was at the cutting edge of computer chips in

the 1990s and 2000s, stumble in the era of AI, according to

Reuters interviews with nine people familiar with the matter

including former Intel executives and industry experts.

Last week, Intel's ( INTC ) second-quarter earnings triggered a stock

price decline of more than a quarter of its value in its worst

trading day since 1974.

For the first time in 30 years, the tech company is worth

less than $100 billion. The erstwhile market kingpin - whose

marketing slogan "Intel Inside" long represented the gold

standard of quality - is still struggling to get a blockbuster

AI chip product to market.

Intel is now dwarfed by $2.6 trillion rival Nvidia ( NVDA ),

which has pivoted from video game graphics to AI chips needed to

build, train and operate large generative AI systems like

OpenAI's GPT4 and Meta Platforms' ( META ) Llama models. Intel

has also fallen behind the $218 billion AMD.

Asked about its AI progress, the Intel spokesperson referred

to recent comments by CEO Pat Gelsinger, who said the company's

third-generation Gaudi AI chip, which it aims to launch in the

third quarter of this year, would outperform rivals.

Gelsinger said the company had "20-plus" customers for the

second and third generation of Gaudi and that its

next-generation Falcon Shores AI chip would launch in late 2025.

"We are nearing the completion of a historic pace of design

and process technology innovation, and we are encouraged by the

product pipeline we're building to capture a greater share of

the AI market going forward," the spokesperson told Reuters.

GAMING CHIPS SWEEP AI

On the OpenAI front, Microsoft ( MSFT ) stepped in to make

an investment in 2019, propelling itself to the forefront of the

AI era triggered by the 2022 release of ChatGPT and a frenzy of

activity among the largest companies in the world to deploy

AI.

Although in hindsight the prospective deal was a missed

chance for Intel, the company has been gradually losing the

battle for AI supremacy for more than decade, according to the

former executives and industry experts interviewed.

"Intel failed in AI because they didn't present a cohesive

product strategy to their customers," said Dylan Patel, founder

of semiconductor research group SemiAnalysis.

For more than two decades, Intel believed the CPU, or

central processing unit, like the ones that power desktop and

laptop computers, could more effectively handle the processing

tasks required to build and run AI models, according to four

former Intel executives with direct knowledge of the company's

plans.

Intel engineers viewed the graphics processing unit (GPU)

video gaming chip architecture, used by rivals Nvidia ( NVDA ) and

Advanced Micro Devices ( AMD ), as comparatively "ugly," one of the

people said.

By the mid 2000s, though, researchers had discovered that

the gaming chips were far more efficient than CPUs at handling

the intensive data crunching necessary to build and train large

AI models. Because GPUs are designed for game graphics, they can

perform an enormous number of calculations in parallel.

Nvidia's ( NVDA ) engineers have spent years since then modifying the

GPU architecture to tune them for AI uses, and built the

software necessary to harness the capabilities.

"When AI hit ... Intel just didn't have the right processor

at the right time," said Lou Miscioscia, analyst at Japanese

investment bank Daiwa.

NERVANA AND HABANA

Since 2010, Intel has made at least four attempts to produce

a viable AI chip, including acquiring two startups and at least

two major homegrown efforts. None have made a dent against

Nvidia ( NVDA ) or AMD in the rapidly expanding and lucrative market,

according to three people with direct knowledge of the company's

internal activities.

Intel's ( INTC ) entire data center business is expected to generate

sales of $13.89 billion this year - which includes the company's

AI chips but many other designs too - while analysts expect

Nvidia ( NVDA ) to generate data center revenue of $105.9 billion.

In 2016, Intel CEO Brian Krzanich sought to buy its way into

the AI business by acquiring Nervana Systems for $408 million.

Intel executives were attracted to Nervana's technology, which

was similar to a tensor processing unit (TPU) chip made by

Google, according to two former executives.

The TPU - specifically designed for building, or training,

large generative AI models - stripped away a conventional GPU's

features useful for video games and focused exclusively on

optimizing AI calculations.

Nervana enjoyed some success with customers including Meta

Platforms ( META ) for its processor, though not enough to prevent Intel

from switching horses and abandoning the project.

In 2019, Intel bought a second chip startup, Habana Labs,

for $2 billion before it shut down Nervana's efforts in 2020.

Krzanich did not respond to a request for comment for this

article.