Two years after the debut of the first, beleaguered Itanium server chip, Hewlett-Packard ( HPQ) insists the time has finally come to start making good on the silicon it co-developed with Intel ( INTC).

It won't be an easy sell. IT spending remains drowsy, and businesses must overhaul their software applications before they will run on the newfangled Madison architecture. On top of that, Itanium's brief but checkered track record is bound to hinder marketing.

Yet in the longer term, the potential rewards for H-P are tantalizing. Though server sales have tanked over the last couple of years, the market is still massive -- valued at just under $50 billion in 2002 -- and it's expected to resume growing in the single digits over the next five years.

"That's still a lot of money being spent," points out Mark Melenovsky, an analyst at IDC. "If H-P can attack that profitably and take share away from IBM and Sun, that's a great opportunity."

Aside from the strategic potential for share gains, the latest version of Itanium offers a more assured benefit: H-P can stop funneling so much money into its own high-end PA-RISC and Alpha chips. On Itanium, it shares development costs with Intel, which manufactures the silicon. "Instead of us having to invest in a processor, or multiple processors, some of the savings will go to the bottom line and some we can reinvest" in new areas of research, says Mark Hudson, vice president of H-P's enterprise servers and storage. Though he declines to say exactly how much H-P will save, one analyst has pegged the cost in the hundreds of millions.

This being the sharkish hardware industry, of course, a rival is already vying to exploit the shift. Sun plans to make a grab for customers of H-P's discontinued proprietary chip lines, wooing them over to its own Sparc hardware. "We'll offer a sweet financial deal," promises Larry Singer, vice president of Sun's strategy office.

Dysfunctional Family

Meanwhile, peddling Itanium won't be a cakewalk. Merced, the seemingly hexed first version introduced in 2001, was beset by delays and proved resoundingly unsuccessful. Its successor, McKinley, has been found to trigger server crashes -- hardly the stuff to prod sales. IBM was planning to offer McKinley-powered boxes, but says most of its customers decided to hold off after news surfaced about the chip's flaw, preferring to wait for Madison.

In its brief life span, Itanium has already won a reputation for screw-ups. "What happened with Merced took a lot of wind out of Itanium's sails," says Christopher Whalen of research boutique Ramberg, Whalen. "Nobody ever likes to hear about a design error. You don't really hear about things like that from Big Blue."

As it stands, only a tiny number of servers run on Itanium. Itanium generated a mere $100 million in sales in 2002, accounting for less than 1% of the market.

H-P, which would dearly love to grab server share, is hoping Madison will change that. "For the first time, the applications are there," says H-P's Hudson, noting that leading software outfits have now rejiggered their offerings to run on Itanium's 64-bit architecture. "No matter how good the tech is, if you don't have the ISVs -- Oracle, PeopleSoft, SAP, Microsoft -- on board and supporting the architecture, customers really can't do much with it."

Yet there remain thousands and thousands of smaller applications, found everywhere from airline reservations to restaurant ordering systems, that need to be ported again before they can run on Itanium. Potential customers of Itanium must ensure they're all retooled to work on the chip.

Indeed, H-P's rivals note that at a time customers are trying to pare down their budgets, most would prefer that IT vendors assume any risks related to new technology. By requiring that applications be retooled, Itanium puts risks in the customers' camp, they say.

To be sure, while new buyers may be reluctant to make big investments now, it wouldn't be the first time they've had to rework applications for new technology. "When people ported from mainframe to Unix in the early '90s, that was a cost they had to eat," notes IDC's Melenovsky. "When you do long-range planning, you start looking at what platform offers the best return on investment over time."

Case in point: Raymond James plans to run Itanium on Superdome, H-P's high-end server, for a new project to store terabytes worth of data from customers and financial advisers who work for the company. The company won't need to port anything again at the outset, but acknowledges it will have to modify applications on existing hardware that will later be shifted to Itanium.

"This architecture is our strategic direction," explains Raymond James CIO Tim Eitel. "As technology changes, I think you have to be prepared to change with it." He says he was inclined to go with H-P's new offering in part because his shop was already stocked with hardware from Compaq and H-P.

Yet H-P may find it much harder to win over entirely new customers to Itanium.

"If it was you running a data-intensive shop, which would you buy, an Itanium or IBM? Probably IBM," says Whalen. "It has a more robust system architecture, better software support and deeper software. Itanium is an odd duck" because it requires applications to be ported again, he adds.

Still, H-P is gamely hoping to steal some share from IBM's pSeries chips, based on Big Blue's Power architecture. H-P argues that in a test of performance, Itanium cranked through more transactions per minute. IBM doesn't dispute the numbers, but says it will come out with its own upgrades as market demand develops.

That raises a salient question: How many customers really need H-P's powered-up goods? "Intel has basically been out in different industry forums saying this is really neat stuff, but we don't think customers need 64-bit architecture in volume yet," points out Whalen. "I think with the early screw-ups and lackadaisical attitude from Intel, I wouldn't get that excited" about Itanium.

Future Play

To be on the safe side, IBM will nonetheless offer two Itanium-based servers while continuing to hawk its own chip line. Dell ( DELL) has also rolled out an Itanium-based server.

The only big hardware shop to turn up its nose at the line is, not too surprisingly, Sun, which routinely gets panned for its steadfast embrace of proprietary Sparc chips. Asked who stands to lose from Itanium, H-P's Hudson replies immediately, "Sun, big-time."

If Itanium catches on, Sun stands to suffer more than any other player, says Frank Gillett, principal analyst at Forrester Research. "They'll lose their differentiator -- that their engineering is superior for high-end servers. If they use the same chip as everybody else, that story has to go out the window."

It will take time to figure out whether Itanium can exert that kind of draw. IDC reckons it will account for only around 16% of the server market by 2007.

But H-P isn't bothered by that projection, saying it's hitched its fortunes to Itanium for the long term. "The architecture is built for the next 15 or 20 years," insists Hudson. "We're really just getting started."

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