Intel Presents New Internet Strategy

The chipmaker plans to spend millions on new data centers, or 'server farms' that will support the next AOLs.
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NEW YORK -- Intel (INTC) - Get Report plans to enter the Web hosting business by building "data centers," where it will maintain Internet server equipment around the world.

Intel has no plans to become

America Online

(AOL)

, but it will be the behind-the-scenes-force providing support for AOL wannabees, much like how the long distance telephone companies resell their lines to other long distance providers.

That's the message Intel executives gave Thursday in New York at the company's spring analyst meeting. Each of these data centers, or server farms, is going to require a $50 million to $100 million investment and will handle between 2,000 and 5,500 servers each. Intel expects to start with a small test center in Santa Clara, Calif., with 100 servers in June.

Web hosting is only one part of Intel's ambitious new Internet strategy. Another area of development will be in the burgeoning market for chips not destined for traditional PC use. "As this

Internet appliance market develops," said CEO Craig Barrett, "we hope to be the premier building block supplier." Intel's chips -- both the traditional x86 architecture and its new StrongArm chips -- will supporting multiple operating systems to drive servers, automotive gadgets, set-top boxes, cell phones, handheld computers and anything else that can dish up the Internet.

Intel's shift in focus relies on the notion that the Internet has created a new world, one that may not revolve around the PC. As the Net penetrates every aspect of consumer experience, new technologies will be constantly in demand; Intel wants to develop them. They already face wily competitors: Just look how upstart companies like

Broadcom

(BRCM)

have taken control of key segments of the fast-growing communication chip market.

Intel isn't quite as arrogant as it was back in November when it last gathered analysts and reporters together. Then, the PC market had rebounded, Intel stock had risen 33% in a little over a month and Intel solidly held the dominant share of the desktop retail market. Barrett was so cocky he couldn't resist taking

pot shots at then

Merrill Lynch

analyst Thomas Kurlak, a long-time and -- at that time -- lonely Intel bear. But now

Advanced Micro Devices

(AMD) - Get Report

power the top three PCs sold through retail channels according to

PC Data

. Intel's stock, after reaching a high of 70 1/2 on Jan. 29, has been volatile, closing at 61 7/16 Thursday.

Determined to recreate its early '90s status as the dominant technology company, Intel is investing in just about every communications-related technology out there. Last month Intel announced plans to purchase network chipmaker

Level One Communications

(LEVL) - Get Report

.

Its renewed ambitions are prompting Intel to embrace and develop new standards rather than pushing the industry to accept old practices -- wisely anticipating that new communications customers might balk at bully tactics.

This trend toward flexibility is also evinced in Intel's changed attitude about memory standards. The company is no longer trying to force the next generation of memory-enhancing chip designs by

Rambus

(RMBS) - Get Report

down the throats of memory chipmakers like

Micron

(MU) - Get Report

and

Toshiba

.

Intel, said Paul Otellini, who heads Intel's architecture business group, would support both Rambus dynamic random access memory and the current synchronous DRAM and come out this year with chipsets for both. "

Information technology managers do not want to go through a lot of re-qualifications as they address Y2K issues," Otellini said. In other words, customers will likely be disheartened using a brand-new technology as they work out Y2K bugs.

Intel's memory plans are even more flexible than Otellini was willing to state at the meeting, says

CS First Boston

analyst Charles Glavin. His sources in the memory industry say that Intel's new chipset, now called 810E, will support PC-133 DRAMs -- the next generation of SDRAM that is regarded as a Rambus alternative. This chipset will support Intel's entire line of chips from the low-cost Celeron to the high-priced Xeon, Glavin says.

For the first time, Intel broadcast the analyst meeting live over the Internet. The reason: to attract individual investors who tend to hold onto the stock longer than institutional investors. But even professional Wall Streeters were impressed with the plans, as well as with cost-cutting measures that helped maintain high margins.

"It was very, very upbeat," says

Merrill Lynch

analyst Joseph Osha, who has a long-term buy on the stock. Osha took over Intel coverage from Kurlak in January.