SAN JOSE — Intel Corp.’s quest to dominate the high-end server market got a major boost Monday as Compaq Computer Corp. said it plans to abandon its own Alpha processor in favor of Intel’s Itanium processor by 2004. It’s the latest sign that the server industry may be moving away from proprietary chips and toward standardization that marked the development, growth and flexibility of PCs.
Compaq is the second maker of processors and servers – workhorse computers that power everything from corporate networks and Web sites to biotechnology research – to announce plans to eventually exit the chip business.
Hewlett-Packard Co., which co-developed Itanium, also said it will consolidate its products behind the Intel processor.
For Intel, the agreement represents not just another customer, but a major endorsement of Itanium, which was put into production this year after several delays and nearly a decade of development.
“Itanium needed an imprimatur of legitimacy,” said Drew Peck, an analyst at SG Cowen Securities. “Compaq gave it to them. It’s a high-profile win.”
High-end servers account for about half of the $54 billion total server market. Major players include International Business Machines Corp., Sun Microsystems Inc., HP and Compaq.
So far, Sun is the only company that does not plan to incorporate the Itanium into any of its designs, instead relying on its proprietary processors.
Shares of both Intel and Compaq closed higher Monday. Intel was up 97 cents to $28.58 on the Nasdaq Stock Market. Compaq’s stock price rose 40 cents, to $13.90 on the New York Stock Exchange.
Intel also will acquire Compaq’s Alpha equipment and tools, as well as license its technology. Several hundred Compaq employees will be offered transfers, the companies said.
Intel plans to use those engineers in future Itanium development, said Paul Otellini, executive vice president and general manager of Intel’s Architecture Group.
“A real sweetener for Intel is access to all the engineers. You can’t shortchange that,” said Dan Scovel, an analyst at Needham & Co. “Getting hold of processor engineers these days is not an easy thing to do.”
Houston-based Compaq acquired the Alpha chip technology through its $9.1 billion purchase of Digital Equipment Corp. in 1998.
Compaq denied that it is backpedaling from the acquisition. The company will focus on developing improvements on components and software outside the processor.
“What you’re seeing is a transition in where vendors believe they can add their value, and it’s not in proprietary microprocessors,” said Mike Winkler, executive vice president of Compaq’s Global Business Units.
Compaq said it will support the Alpha architecture even after it consolidates its entire 64-bit server family on the Itanium architecture.
The announcement comes as both Intel and Compaq are struggling to regain their footing as their PC-related businesses struggle.
Compaq faces a brutal price war with other PC makers, including Dell Computer Corp. Intel also has seen its margins and market share erode amid increasing competition and the economic downturn.
Compaq announced plans in April to cut more than 9,000 full-time and part-time jobs. In an internal memo this month, executives announced plans to reduce overhead costs by another $200 million per quarter.
More than half of Compaq’s revenues now come from non-PC businesses, including its servers and services businesses, Winkler said.
Intel has been diversifying beyond its 32-bit processors that are found in roughly 80 percent of personal computers around the world. Its targets are now on high-end server makers Sun Microsystems Inc. and IBM.
The Itanium processes information in 64 bit chunks. It also can address more memory and transfer data more quickly, allowing for exponential improvements in performance.
Itanium is Intel’s first move into the 64-bit arena. The Alpha, introduced by Digital Equipment Corp. in 1993, was the first.
Intel is hoping big sales of Itanium will help offset the high development costs — something the developers of proprietary processors cannot do so easily, said Nathan Brookwood, an analyst at the research firm Insight 64.
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