Intel-Sun war heats up with the merger

Jim Christie

SAN FRANCISCO: The proposed merger between Hewlett-Packard Co. and Compaq

Computer Corp. raises the prospect of success for Intel Corp.'s bid to set the

industry standard for chips that power corporate servers, analysts said on

Tuesday.

The merger confirms the backing for Intel in its effort to make its Itanium

chip the dominant server chip, just as its microprocessors became the brand to

beat in the personal computer market.

Intel released its first-generation Itanium chip earlier this year, taking on

competing hardware from Sun Microsystems Inc. and International Business

Machines Corp.

Showing no sign of backing away from the fight, Sun said on Tuesday that the

HP/Compaq merger could create an opportunity for it to sell into a sales vacuum

and blasted the Intel chip offering as more hype than performance.

The Itanium 64-bit chip processes much more data at once than does the

company's desktop 32-bit chip. Intel had commitments from both Hewlett-Packard

and Compaq before their merger announcement to integrate the Itanium line into

their servers.

Intel is trying to extend its market leadership position to the higher-end

corporate servers, an area where it faces huge competition from respected firms

that generally develop both chips and operating systems.

The Itanium offers the promise of relatively cheap chips that can run many

operating systems, allowing developers to focus on making software rather than

chips, an area where Intel maintains a major advantage because of its larger

production scale.

The proposed merger between Intel allies HP and Compaq, a newly found

partner, focused attention on the chipmaker's heightened competition with Sun,

which will launch a new high-end server with its proprietary UltraSPARC III

microchip later this month.

"The workstation server market is going to be split between two

competing architectures: the Sun SPARC architecture and the Intel Itanium

architecture," said Hans Mosesmann, a managing director with Prudential

Securities. "We've gone from 20 competing architectures 10 years ago to

two."

Douglas Lee, a senior semiconductor analyst for Banc of America Securities,

called the proposed merger a "marginal positive for Intel," as it

locks in the Itanium chip as Hewlett-Packard's and Compaq's server semiconductor

standard during their merger.

Mosesmann said since Hewlett-Packard and Compaq were well on their way to

taking up the Itanium chip before their announced merger, little had changed for

Intel in the short-term.

Intel shares closed down almost 4 percent on Tuesday, shedding $1.11 to end

at $26.85. The company has been locked into a price war on the PC front with

rival Advanced Micro Devices Inc. and investors have turned cautious that a

mid-quarter business update due Thursday could feature a warning on earnings.

Pluses and minuses



In addition, the Semiconductor Industry Association released data on Tuesday
showing global chip sales off more than 37 percent in July, hit by slowing

economic activity and bloated inventories.

Those negative factors outweighed the potential support from a more powerful

ally in a merged HP, especially since Compaq had announced in late June that it

was abandoning its own proprietary chip, the Alpha, a pioneering technology

developed by the company's Digital Equipment Corp. unit.

"Compaq's future products, with or without HP, would have included Intel

chips," said Mosesmann. "We've already known for five or six years

that HP was going to develop the next generation 64-bit processor with

Intel," he said.

A Sun Microsystems executive said the proposed merger could hinder Intel's

rollout of Itanium chips.

"It reduces the number of companies carrying Itanium by one," said

Shahin Khan, vice president of marketing for computer systems for Sun

Microsystems. "The confusion it creates among Compaq's customer base and

field force will provide an opportunity for Sun in the short term. It causes

customers to pause to find out what happens to product road maps."

"Intel has been focusing on workstation environments rather than the

server environment, contrary to what they promised Itanium to be," Khan

added. "It just hasn't entered the market as the full-fledged server

microprocessor that Intel promised it to be."

Prudential's Mosesmann said Intel stands to be the long-term winner in the

competition given its manufacturing capability. "I think Intel's solution

will probably be the one to gain market share in the coming years,"

Mosesmann said. "Intel is able to update and scale their processors much

more quickly than Sun."

(C) Reuters Limited 2001.