by Elizabeth Corcoran and Quentin Hardy
For the first time in decades perennial underdog Advanced Micro Devices has one-upped the chip king, Intel Corp. One of AMD's latest microprocessors, Opteron, is winning over loyal Intel customers, and Intel has now conceded it must match it. Just how seriously Intel miscalculated the needs of business customers became clear in late February when HP, Intel's longtime partner and a codeveloper of its top-of-the-line Itanium chip, said that it would begin using Opteron as well as Intel chips in its low-end and midrange servers.
The HP announcement followed similar declarations by the likes of Sun Microsystems, IBM and Fujitsu Siemens--in fact, virtually all the big computer makers except Dell have opted for the 64-bit Opteron. Says Richard Marcello, HP's senior vice president of business-critical servers, "The fundamental reason we picked Opteron right now is that the overall performance is very good."
In the year since Opteron's arrival, AMD has come from nowhere to become a contender in business computing. Sunnyvale, Calif.-based AMD has at least another few months to gallop unchallenged through the selling fields. Intel Chief Executive Craig Barrett has said his Opteron-beater won't be ready until midyear. Quips Hector Ruiz, AMD's chief executive: "We are happy that our competitor sees the advantages of AMD64 and has decided to try and adopt a similar strategy."
Right now AMD's share of the $11 billion market for chips that power midrange servers is tiny, says analyst Nathan Brookwood with Insight 64 in Saratoga, Calif. The company could capture $680 million in sales this year and up to $2 billion in 2005, with juicy 80% gross margins, he says. AMD needs the boost. In fiscal 2003 it lost $274 million on sales of $3.5 billion.
Sacrificing a billion dollars to AMD is a flesh wound for Intel, which grossed $30 billion last year. But the psychic gash is deep. Opteron doubles, from 32 in the last generation, the number of bits that a microprocessor handles at one time. As a result it increases, from 4 billion bytes to a number 4 billion times as large, the amount of memory that can be used by software running on the chip. Intel spent a decade and, by at least one estimate, more than $1 billion developing the Itanium, its own 64-bit chip, but has had trouble getting customers to use it.
Intel's tactical blunder was in breaking with its tradition of designing chips to run old software. "Intel thought that being Intel, it could force everyone to switch" to the new design, says Linley Gwennap, a longtime chip analyst who heads The Linley Group in Mountain View, Calif. "Intel didn't think there would be an alternative," he adds.
The first Itanium, available in 2001, was a dud. Its successor, dating to 2002, also had a lackluster reception. Software writers found Itanium difficult to program. Worse: It didn't run most programs dramatically faster than Intel's 32-bit Xeon chips, it radiated tremendous heat and it was expensive. In April 2003 AMD plunged into the gap with Opteron, which runs both old 32-bit software and revved-up 64-bit software. "It may look like magic, but it wasn't," says Martin Seyer, vice president of AMD's microprocessor group. "Customers wanted to protect their software investments."
It was only last June that Oracle, IBM, Microsoft and others finally began selling databases written for Itanium. "Last year was a watershed year for Itanium," declares Lisa Graff, who is director of Intel's Itanium group. That's faint praise: Intel sold 110,000 Itanium chips last year--a big boost over the past but barely a ripple among last year's estimated sales of 2.9 million 32-bit Xeon servers.
HP executives are quick to say that Opteron best fits systems in which one to four processors will do the job. Itanium, they argue, suits those with the biggest computing loads, such as large databases or scientific modeling that require eight or more processors. "We have no illusions about making that market available to AMD anytime in the future," HP's Marcello says. Counters Ruiz: "Our path to pervasive 64-bit computing remains clear, while our competitor's only becomes increasingly muddy."
But the rise of Opteron has injected competition into a part of the market where the only color was Intel blue. Sun has its own 64-bit UltraSparc chips running its own Solaris software, but it is now also heavily flogging a low-priced Windows-compatible line using Opteron chips to appeal to a huge base of customers it was missing. Says Sun's chief architect, Andreas Bechtolsheim, "With the exception of UltraSparc, Opteron has the best performance of any chip we've seen." Cashing in the Chips
Rivals to Intel reap more per server shipped. Itanium is its pricey response.
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