With Sun Warming To Intel's Xeon, Server Wars Heat UpWith Sun Warming To Intel's Xeon, Server Wars Heat Up

SAN JOSE, Calif. — Just six months ago, Sun Microsystems Inc. chief architect Andy Bechtolsheim was lampooning Intel microprocessors as power hogs. Advanced Micro Devices' CEO, Hector Ruiz, was a darling of Wall Street, where rumors were rife that Dell soon would adopt AMD's Opteron chips.

How times have changed. Today, Sun's engineers are polishing off one-, two- and four-way Xeon server designs and planning even larger systems with the Intel CPUs. Meanwhile, Wall Street is pummeling AMD for being on the losing end of a price war that analysts think threatens its business model.

The wheel has turned full circle in servers, and it will likely turn again soon.

Sun jumps on X86
Sun last week adopted Intel's Xeon pro- cessor in a move that reflects the practical business philosophy of its new chief executive, Jonathan Schwartz. The deal parallels Apple Computer Inc.'s embrace of Intel processors in 2005.

"Perhaps the most interesting part of the [hardware] relationship is [that] we're pairing up to do some collaborative engineering around larger systems, where larger implies greater than four sockets," wrote Schwartz in his blog.

A day later, Sun announced its first profit in five quarters and the promise of a second year of revenue growth following four disastrous years in the wake of the dot-com crash. Sun said its second-quarter revenue hit $3.56 billion, up 7 percent from the year-ago quarter. Profits were $126 million, compared with a loss of $233 million a year ago.

The company cut 12 percent of its work force, or about 4,500 people, last May. In the past year, it has rolled out a handful of compelling systems based on Opteron and Sparc processors.

"I saw their turnaround taking hold a year ago, and it's finally manifesting itself in profits," said Nathan Brookwood, principal of market watcher Insight64 (Saratoga, Calif.).

As a final plank in its comeback, Sun joined its server competitors in supporting both Intel and AMD X86 chips. Hewlett-Packard Co. started the trend about two years ago, adopting AMD's Opteron as well as Intel's Xeon and Itanium CPUs. IBM and Dell soon followed suit.

"Now all the big server suppliers are taking a chip-agnostic strategy," said Brookwood. "Instead of these OEMs needing to evangelize a particular chip architecture, they are getting out of the way and letting users decide what they want. That's how it should be, but it's radically different from how things were just a year or so ago."

"There is a change in how we are going after the marketplace and putting some of our past rhetoric aside," said Schwartz, referring to the sometimes caustic, sometimes comic comments former CEO Scott McNealy would level at competitors including Intel and Microsoft. "One of my first tasks [after becoming Sun CEO in 2006] was calling Paul [Otellini, Intel's CEO] to see how we could collaborate."

Sun has shipped servers since 2004 using AMD's Opteron CPUs. Schwartz said that selling X86 servers using Intel's Xeon as well will open up "an enormous ex- panse of market opportunity."

Brookwood said he doesn't expect the deal will make much of a dent in the number of AMD CPU systems Sun ships. Instead, Sun is likely to gain business that has gone to other Xeon server vendors, he said.

Details were scarce on how Sun and Intel will collaborate or how Sun will differentiate its Xeon systems from those of competitors. Otellini said he would like to see support in Solaris for the I/O Acceleration Technology and demand-based switching Intel is building into its Core Duo processors. Schwartz said the companies could synchronize their plans for supporting server virtualization at the chip, system and network levels.

The deal marks the end of direct competition between Sun and Intel in server CPUs, though Sun will continue to develop its own Sparc processors and servers based on them.

Sun's dark spots
Sun faces plenty of challenges trying to differentiate its Xeon systems from the crowd. Perhaps its greatest risk is whether crack designer Bechtolsheim, long an Intel critic, will leave for more interesting pastures back in the startup world.

In July, Bechtolsheim played the proud papa, rolling out three Opteron-based systems. The Sun Blade 8000 was the most strategic of the trio, because the server blade category is widely seen as the future of the data center.

At the time, Bechtolsheim said his main goal was shrinking the Sun Blade chassis to a more compact form factor--something that won't be easy if it has to incorporate the less-integrated Xeon CPUs.

Also in July, Bechtolsheim announced the SunFire X4600, one of the first servers to push Opteron to the limit by packing eight CPUs in a 4U-size box. Creating an eight-way Xeon product that is not larger and more power hungry will be a huge challenge.

At the time, Brookwood noted that a four-way, dual-core Opteron system could be built on an eight-layer circuit board. A similar Intel system likely will require a 12-layer or thicker board, he said.

Nevertheless, Brookwood now sees plenty of opportunity for Sun to design unique Xeon servers, and Bechtolsheim could be just the engineer to do it. IBM and Hewlett-Packard have been showing plenty of innovation in cooling, networking and management in their Xeon server blades, he noted.

"There are a lot of ways to package these products for differentiation. It's not like the PC business," said Brookwood. "Bechtolsheim is a master at taking off-the-shelf components and whipping up gourmet product out of them."

Wolf in the boardroom?
In perhaps the most interesting tidbit to emerge from Sun's quarterly financial statement, private-equity company Kohlberg Kravis Roberts & Co. has taken a $700 million investment in Sun. A representative of KKR will get a seat on Sun's board, taking the place vacated last year by longtime Kleiner Perkins investor John Doerr.

Wall Street analysts scratched their heads over the deal. They wondered whether it was a sign the private-equity giant behind several high-tech buyouts might seek to take Sun private.

Sun's Schwartz shrugged off those concerns in a conference call, calling the deal an "opportunistic" one that could raise Sun's profile in the financial-services sector. "We intend to use proceeds from this placement to pursue strategic opportunities for growth," Schwartz said in a prepared statement.

"There's a lot of speculation out there about this deal, given that Sun already has a boatload of cash," said Gordon Haff, an analyst with Illuminata Inc. (Nashua, N.H.). "I don't really see Sun tooling up for a major acquisition spree, given that its [June 2005] acquisition of StorageTek still needs lots of work."

Brookwood disagreed. "I think [the KKR deal] could [foreshadow] more on the M&A side," he said.

Brookwood discounted speculation that Sun might go private, then public again, as disk-drive maker Seagate Technology did several years ago, making profits on both sides of the deal.

"It might have made sense for Sun to do that a few years ago, when Wall Street was saying Sun should slash R&D and be more like Dell," Brookwood said. "Now they have bitten the bullet and are in a strong product cycle."

AMD in the dumps
Meanwhile, the speculation surrounding Advanced Micro Devices Inc. was generally on the negative side. At least four analysts downgraded AMD's stock in the light of a large quarterly loss, partly attributed to the company's continuing price war with archrival Intel.

"We'd prefer to watch this celebrity death match from the cheap seats," quipped Michael Masdea of Credit Suisse.

Analysts at Friedman, Billings, Ramsey & Co. Inc. predicted dire technology repercussions for AMD as its cash flow dries up in the heat of this price war. "We do not think AMD has the cash to fund both R&D and its capex needs, requiring the need to either raise cash or scale back its plans," the firm wrote in a report.

Indeed, things could get worse before they get better. While AMD will roll out a native quad-core CPU in a 65-nanometer process technology this year, Intel will respond with its first 45-nm parts. This comes as AMD digests half a billion in costs largely associated with its acquisition last fall of ATI Technologies, a deal that ultimately should help propel AMD into the multicore future.

Last week, AMD reported fourth-quarter 2006 revenue of $1.77 billion and a net loss for the quarter of $574 million, mainly from charges related to the ATI purchase. Unit shipments of server processors were essentially flat compared with the third quarter, and average selling prices were down significantly.

AMD president Dirk Meyer termed 2006 a strategic success, pointing to the ATI acquisition and new customer wins. But "we need to improve our financial performance," he said.

Indeed, last year AMD parts were designed into new servers, notebooks and desktops from Dell and servers from Gateway for the first time. The company also got more design wins from IBM, HP and Sun.

But Intel leapfrogged the dual-core Opterons with quad-core versions of its chips (although Intel used a system-in-package approach to achieve fast time- to-market).

"Both vendors are now deeply entrenched at all the tier-one OEMs. These factors will tend to make price a more important buying criterion for the end user as the other differentiating factors, such as chip performance, go away," said Haff of Illuminata.

The back-and-forth between the microprocessor giants could mitigate the intensity of the X86 price wars as 2007 progresses. "What you are seeing play out is the saga of two companies with product cycles that are out of phase," said Brookwood of Insight64. "Intel had a big product cycle last year; AMD has one this year. This game is not over, by a long shot."

Indeed, AMD will ship its Barcelona chip this summer. The part integrates four cores on the same Opteron die and is expected to provide a performance boost over Intel quad-core CPUs. Later in the year, AMD will roll out an upgraded notebook chip with an advanced core and the capability to adjust voltage and frequency independently for each core, probably providing a low-power edge over Intel's Centrino.

"I don't think [AMD] will have to face the same level of price discounting as they did in the last quarter once they get to Barcelona" and the new mobile CPUs, Brookwood said.

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