Intel's Barrett Copies Sun, IBM Tactic to Lift Profit (Update2)

Articles: Intel's Barrett Copies Sun, IBM Tactic to Lift Profit (Update2)

Posted by admin on Wednesday, April 14, 2004 - 01:33 AM

April 13 (Bloomberg) -- Intel Corp. is copying a marketing tactic from rivals to bolster sales of its Itanium chip, which has garnered less than 5 percent of the market for semiconductors that run the most powerful servers since it was introduced three years ago.
Craig Barrett, chief executive officer of Intel, the world's largest maker of semiconductors, began in December to offer free trials to customers for 90 days. Sun Microsystems Inc. and International Business Machines Corp. have used such promotions to dominate the $5.3 billion business. Sun has about 56 percent of the market, and IBM has 24 percent, according to Gartner Inc. ``We thought, `Let's take a page out of their playbook,''' Lisa Graff, 38, who runs the free-trial program at Santa Clara, California-based Intel, said in an interview. The chipmaker said first-quarter net income almost doubled to $1.73 billion late today, after the company was expected to report $1.8 billion, the average estimate of analysts surveyed by Thomson Financial. Sales rose 20 percent to $8.1 billion, trailing the $8.16 billion average estimate of 33 analysts. Intel has 80 percent of the market for chips that run personal computers and also sells chips that run 98 percent of the low-end servers. Barrett has focused on capturing the higher- end business for servers because Itanium chips sell for as much as 10 times the price of the Pentium 4 used in PCs. Server Shipments ``Intel was late to the server game, but they'll make it up,'' said Jane Snorek, who helps manage $110 billion including Intel shares at U.S. Bancorp in Milwaukee. ``Their server business is doing well, and the growth rate in that business is very strong.'' Intel shares fell 27 cents to $27.40 at 4:33 p.m. New York time in Nasdaq Stock Market composite trading after the report. The stock's 14 percent drop this year is the worst in the Dow Jones Industrial Average, after the shares climbed the most of any Dow member in 2003. The server business is attractive to Barrett because it is growing faster. Server shipments will rise 15 percent in 2004, compared with 11 percent for desktop PCs, research iSuppli Inc. predicts. Waning demand for PCs and laptop computers will slow Intel's sales growth to 9 percent by the end of this year from 20 percent in the past three quarters, according to Thomson Financial estimates. Itanium represented the beginning of Barrett's plan to dominate sales of high-end servers, which search large databases and execute complicated calculations. Itanium processes data in 64-bit chunks instead of the typical 32 bits. Barrett, who is 64, declined to comment for this article. Lehman Converts Barrett's bonus rose 41 percent last year to $1.51 million, and he received options to buy 1.35 million shares, twice as many as in 2002. His 2003 salary was $610,000. Intel spent seven years developing the chip with Hewlett- Packard Co. as an alternative to processors sold by Sun and IBM. IBM makes its own high-end processors and machines. Itanium is ``poorly perceived'' by customers, said Clark Masters, a Sun executive vice president. IBM spokesman Chris Andrews didn't return a call seeking comment. Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, accepted an offer to try some Itanium servers before committing to buy them, Savet Elias, a Lehman vice president, said in an interview. He is converting his systems from running mostly on Sun machines to using Intel, he said. ``We can't afford to be jumping ship every quarter,'' Elias said. ``Intel has gone the extra mile in terms of realizing `I need to let you know how to get the most mileage out of the equipment.''' More Profitable Itanium was released two years behind schedule in May 2001 and was slow to catch on. On its release, Mike Fister, who runs Intel's server business, dressed up in tights and a cape and introduced himself as ``Captain Enterprise.'' Intel shipped 3,418 Itanium-based servers in 2002. Sales have since risen, growing to 6,766 in the fourth quarter. Intel yesterday said it would begin selling two new Itaniums. ``Now I play a lot less defense about Itanium than I used to,'' Fister, said in a February interview in San Francisco. ``Where Itanium is strong, it continues to get stronger.'' Itanium chips are more profitable than lower-end server chips such as Xeon. Itanium chips cost as much as $4,227 and as little as $744, compared with Xeon, which commands as much as $3,692 and as little as $198. Acting Different While Intel's chips power about 87 percent of all servers shipped worldwide last year, most of those were driven by lower- priced chips such as Xeon. Intel-based servers represented 43 percent of the $21.4 billion market, according to IDC analyst Mark Melenovsky. Intel decided it would need to change its sales tactics to win market share from Sun and IBM, Graff said. Instead of relying on computer makers to pitch the benefits of the Intel processor inside the machine, Intel needed to work directly with clients to make its case, she said. ``We realized that if we want to participate in the high-end space, we are going to have to act less like a semiconductor company,'' she said. Intel is targeting Sun customers in particular, she said. Intel designed Itanium to complement its Xeon line, which until recently used 32-bit processing. Now Itanium competes with a new line of Xeons, added this year. The new Xeon uses 32-bit and 64-bit processing, an attractive feature for some clients unwilling to spend money on a 64-bit chip and related software. Barrett released the product to match Advanced Micro Devices Inc., which sells the Opteron processor. Hewlett-Packard decided this year to also sell machines with Opteron, as does IBM. The new Xeon line may muddle Barrett's sales pitch, Gartner analyst John Enck said in an interview. ``In the ideal Intel universe, they would never have released this product,'' Enck said. ``They've had this technology in their hands for a long time but they have never wanted to play the card because they were fearful of how it might slow down the introduction of Itanium.''

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