Compaq Deal Vaults Intel Into Unix

It's a big step for the chipmaker, struggling to break Sun's grip on the high-end market.
By Thomas Lepri ,

The slow commoditization of the high-end server market just speeded up a bit.

Compaq's

(CPQ)

decision Monday to give

Intel

(INTC) - Get Report

control of its Alpha microprocessor group is about much more than helping a computer hardware company cut its costs. The deal will mark the chipmaker's entrance into the Unix server market, a market hitherto dominated by proprietary microprocessors developed by companies like

IBM

(IBM) - Get Report

,

Hewlett-Packard

(HWP)

and, most notably,

Sun Microsystems

(SUNW) - Get Report

.

Under the agreement between Compaq and Intel, all Compaq servers that currently run on the Alpha chip will move over to Itanium chips by 2004. Meanwhile, the company will immediately begin adapting the Unix operating systems that run its servers to the Itanium architecture and will have the first major versions out in 2003.

The migration of Compaq's customers from Alpha to Itanium chips may get messy down the road, as most migrations tend to do. But right now, Compaq and Intel are promising a smooth transition through a "plug-and-play" chipset design that will allow customers to simply pop in later-generation Itanium chips as they become available. Intel will do this by offering jobs to the Alpha engineers, who will write the necessary software. During a news conference Monday morning, Intel said that it typically hires engineers straight out of school and that the experienced Alpha team will boost its engineering expertise.

Set the Controls for the Heart of the Sun

The news may have serious, if not immediate, implications for Sun, whose Unix systems dominate the lucrative, high-performance computing market. Servers running

Microsoft's

(MSFT) - Get Report

Windows operating system and Intel chips (also known as Wintel servers) have had very limited success in the high-end market because they can't perform heavy-duty computing tasks as well as machines using more expensive 64-bit RISC processors (RISC stands for reduced instruction set computing), including Sun's family of UltraSparc chips, which the company develops itself at no small cost. According to figures provided by market research firm

Dataquest

, RISC-processor servers are about a $24 billion-a-year market.

Up to now, Intel's movement into the high-end market has been tied to Microsoft's ability to produce a high-performance operating system that can match more capable proprietary systems, including Sun's Solaris. And Microsoft has lagged thus far. The company is scheduled to release a 64-bit version of its Windows server operating system in October, the same day it starts selling its 32-bit system for PCs. But the 64-bit Windows system won't work with systems using more than 16 processors.

The promise of Unix systems running on Intel chips has changed that game. Meanwhile, Compaq's refusal to maintain its own chip-development program highlights what many think will prove to be an inexorable trend among server vendors toward using commodity microprocessors. The

appeal of abandoning proprietary processors in favor of commodity chips is inescapable: It transfers development costs from the server manufacturer to Intel. That's a huge selling point to a company like Compaq, which is now planning to reduce its annual expenses by $800 million, according to an internal memo from CEO Michael Capellas obtained by

TheStreet.com

.

Who's Next?

In the meantime, observers will wonder which systems vendor will be the next to follow Compaq's lead.

"You've got Sun out there with the UltraSparc," says

A.G. Edwards

analyst Brett Miller. "IBM has a lot of internal chip development. H-P, the same thing. Over time, they're going to have to migrate to Intel chipsets. Will their processors be plug-and-play with Intel's? They could be if they sign deals similar to this. But you have to come to the table and buck up. At this time, there's a lot of pride."

Pride wasn't much of a factor for Compaq, which acquired its Alpha server business in its 1998 acquisition of

Digital Equipment

and never fully integrated it. Companies such as IBM and Sun have much more invested in their chip-development programs. In the case of brash Sun, with its whole-hearted devotion to the proprietary model, the investment is as much emotional as financial.

Sun, not surprisingly, isn't showing any signs of nervousness. The company will do its best to steal engineers from Intel and Compaq, says Shahin Khan, vice president of marketing for computer systems. Khan also said that Sun would use the transition as an opportunity to win customers currently using Alpha technology.

The threat that Monday's news represents to Sun remains quite distant. But the benefits to Intel are much more immediate. The company's agreement with Compaq could help give the Itanium processor currency among customers with heavy computing needs. The chip, which was finally launched earlier this month after a two-year delay, has met with some skepticism so far from customers, many of whom have expressed their intentions to wait until next year, when the next generation of Itanium, code named McKinley, will be launched. Now it's clear that the computer makers, at least, are on board.

The move also boosts Intel's potential for revenue at a time when its microprocessor revenue is stagnating. Intel's average selling price also is sliding and smaller competitor

Advanced Micro Devices

(AMD) - Get Report

is eating away at market share. Compaq gets about one-third of its revenue from the enterprise server business.

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