Sun Inks Deal to Use Intel Chips For Servers in A Blow to AMD

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Sun Inks Deal to Use Intel Chips
For Servers in A Blow to AMD

Sun Microsystems Inc. and Intel Corp., two Silicon Valley powers that have frequently taken opposing sides in technology battles, are ready to work together.

The two companies reached an agreement under which Sun will buy Intel chips for use in server systems. In exchange, Intel has endorsed Sun's Solaris operating system and Java software. The alliance, announced at a joint news conference, also includes joint engineering, design and marketing efforts.

SUN SHINES FOR INTEL

• What's New: Sun agrees to use Intel chips in some of its server systems.

• The Background: Sun and Intel are rivals, but Sun has been moving to become more flexible on using other technology.

• The Bottom Line: Sun would be Intel's biggest customer win since a deal with Apple, though not huge in revenue terms. Sun would continue to buy AMD chips.

WALL STREET JOURNAL VIDEO

Intel CEO Paul Otellini and Sun Microsystems CEO Jonathan Schwarz² discuss Sun's agreement to use Intel chips in its servers and what it means for the market space.

Sun's use of Intel chips, while not unprecedented, is a blow to Advanced Micro Devices Inc., which is now Sun's exclusive source for chips based on the popular x86 design used in most personal computers and servers. It also is a sign of the renewed competitiveness of Intel's chips, which outsell those of AMD but whose performance levels had fallen behind that of AMD's products until recently.

Sun, of Santa Clara, Calif., will keep making computers based on AMD chips. That dual-supplier strategy is already used by competitors Hewlett-Packard Co., International Business Machines Corp. and Dell Inc. Adding Intel-based servers would help Sun match the breadth of those rival offerings.

"This is truly a landmark relationship for the industry," said Sun CEO Jonathan Schwartz in a press release. Intel CEO Paul Otellini added,: "Bringing together the best technologies from both Sun and Intel will result in innovative products for years to come."

Sumit Dhanda, an analyst with Banc of America Securities, wrote a research note Friday predicting Sun would begin using Intel chips in servers that would hit the market in late 2007. He based the prediction on unspecified "channel checks," a phrase that often refers to information from companies that supply components to computer makers.

The relationship with Intel is the latest in a series of steps by Sun to become more flexible about technology. The company has an internally developed line of chips called Sparc that was seen in the mid-1990s as a competitive threat to Intel's chips. Scott McNealy, Sun's former chief executive officer, for years criticized rivals for relying too heavily on Intel's x86 line, and was even more derisive about a separate product family, known as Itanium, that H-P and others use for high-end servers.

Intel, meanwhile, has been a major proponent of Microsoft Corp. and its Windows operating system, which Sun battled for years with its Solaris and Java software. But Mr. McNealy and Mr. Schwartz, who was promoted to succeed him as CEO in April, have had to shift strategies as x86 servers became a mainstay in the computer rooms of most companies.

In 2000, Sun bought Cobalt Networks Inc., a maker of smaller servers that used Intel chips; Sun eventually stopped selling those systems. In November 2003, Sun forged a deal to begin making servers with AMD's Opteron chips. Those machines are now one of the fastest-growing parts of Sun's business, though it still gets more revenue from Sparc-based systems.

Servers that use x86 chips often run the open-source Linux operating system or Microsoft's Windows. Sun became more receptive to the latter option after an April 2004 settlement of antitrust claims it filed against Microsoft. But Mr. Schwartz also pushed the company to aggressively market Solaris for x86 systems, an initiative that could be aided by Intel's endorsement.

For Intel, landing Sun is Mr. Otellini's biggest customer win since the June 2005 adoption of its chips by Apple Inc., another frequent critic of Intel technology in the past. Though neither Sun nor Apple buys huge volumes of microprocessors, they are both known as technically savvy and their opinions carry weight among customers.

Sun is likely to remain a close partner with AMD, whose assistance helped make Sun a major x86 server vendor. Mr. Dhanda, with Banc of America Securities, estimated that in 2008 Intel's sales to Sun might amount to $25 million to $50 million -- assuming Intel can grab 25% to 50% of the shipments that now come from AMD. That would lower AMD's annual per-share profit by about one or two cents, he estimated. AMD is expected to post a profit for 2006 of 91 cents a share, according to the average of analysts tallied by Thomson Financial.

John Taylor, an AMD spokesman, declined to comment on the possibility of a Sun-Intel relationship. But he added that competition between the chip makers is good, driving innovation and serving "the market demand for choice."



	January 22, 2007