Intel bets farm on Itanium 2: competitors snipe at chip giant's price/performance pitch - Analysis

Electronic News, July 1, 2002 by Tom Murphy

Intel Corp.'s upcoming release of its Itanium2 chip will mark anew phase in the battle for corporate server farms, pitting Intel against incumbent Sun Microsystems Inc. in what could prove to be the ultimate test of fab vs. fabless business models.

To even get its foot in the door of this market, Intel must deliver on its price/performance promises for Itanium2 and its IA-64 progeny. But to win market share the company will have to go much further, currying favor among software vendors that now develop applications on Sun platforms first--thereby giving Sun performance and time-to-market advantages--and provident the extensive support services that large customers demand for mission-critical systems.

If all goes as planned, Intel believes the high-end server market will provide a $24 billion growth opportunity, which the company needs to retain investors' attention. Without it, Intel faces the prospect of a diminishing growth opportunity in the PC processor space, where it currently holds 80 percent market share and from which it derives 80 percent of its revenue.

But while Intel believes it can wage this battle on price, Sun says Intel already is starting at a disadvantage. Intel owns the fabs that produce the Itanium 2 even though Sun says it will never sell enough chips in the server space to make that investment pay off.

"Intel keeps using the cost argument against us," said David Yen, VP of Sun's processor products group. "But we partner with [Texas Instruments], and we're a fabless semiconductor company. So we don't have the costs of maintaining our fabs. Intel needs to be wary of its own business model in this environment."

Yen added that Intel has to continue growing to justify its market cap.

To that end, the chipmaker has been building fab capacity like no one else in the business. It spent $7.5 billion last year and plans to spend another $5.5 billion this year.

With the PC market facing saturation, Intel needs to justify its capacity expansion into new markets. The problem is that the high-end server market where Itanium 2 goes is not a high-volume market. Accordingly, Sun keeps the volumes of its UltraSparcIII processors relatively low, Yen said.

"To quote a Chinese proverb, Intel is riding a running tiger," Yen said.

Playing the Numbers

Is the volume economics strategy that Intel plans to use in the 64-bit RISC space a potential pitfall? Cost seems to be compelling as Intel presents arguments that Itanium 2 multiprocessor servers priced around $50,000 can actually outperform Sun servers costing as much as $230,000.

But Sun is positioning itself as a complete system house, and Yen said all the comparisons he has seen Intel make were based on component costs. In contrast, Sun offers software and complete systems, which he says is the company's value proposition. At the end of the day, the issue is total cost of ownership, from software maintenance to hardware maintenance and consulting services. Sun also knows its enterprise customers directly, whereas Intel is one or two times removed from its customers in the enterprise space, Yen contended.

Yen said many CIOs don't respond to lower system costs because the hardware only represents 15 percent of the total cost of ownership. In comparison, Intel is driven by how much of a profit margin it can make off of each processor. Yen said Sun's processor development group is not driven by profits, as the company makes no money from its processors.

"The ultimate question for Sun is whether it is offering value to its customers for the price it charges," Yen said. "We have not done a perfect job in the past, but we are working to improve that. But what Intel is offering is a piecemeal view of the whole issue, and that is not what CIOs consider for IT protection.

Meanwhile, Intel believes its fab capacity will offer the lowest price solution and is working with OEMs to ensure business customers now have an alternative to proprietary solutions, said Lisa Hambrick, Intel's director of enterprise processor marketing. It has lined up 20 OEMs to coincide with its launch of the Itaniam 2, and it hopes to create a groundswell of support.

Through upgrades in the microarchitecture, Itanium 2-based platforms can deliver twice the performance at one-fifth the cost of Sun-based solutions, Hambrick said. And in response to claims by Sun about lower cost of ownership, Intel said that Itanium 2 chips can be swapped with later generations of processors without replacing the systems. That means customers will be able to upgrade their performance without replacing entire systems.

Competition Everywhere

As Sun prepares its defense against Intel, AMD is preparing for the Q4 launch of its Opteron processor, which will offer both x86 and 64bit capabilities. While Intel is quick to downplay the capabilities of Opteron, even Sun executives believe AMD's eighth-generation processor provides a compelling argument for IT investors.

AMD's Opteron will allow companies to migrate to more intensive 64-bit computing with less down time, Yen said, because the processors will be compatible with a company's installed software bases. Companies may face major down time if they swap to an Itanium solution, he said.