Intel spends a billion on Net services

Intel wants to be inside computer centers on behalf of Internet-service providers.

Gerhard Parker, a seasoned Intel Corp. manufacturing executive, knew he had left the orderly world of semiconductors when he saw the big slide that connects the first and second floors at the headquarters of Excite Inc.

"I asked them what their safety people thought of that," said Mr. Parker, who recently visited the Redwood City, Calif., offices after cutting an electronic-commerce deal with the Web site. "And they said, 'What safety people?' "

It's not the only new experience lately for Parker, a 55-year-old chip veteran who is helping Intel (Nasdaq:INTC) charge into the Internet and other new businesses. He is dining with Web gurus half his age, pouring money into start-ups and assembling a staff of both experienced operations managers and Web-savvy Generation-Xers. The goals: To anticipate and stimulate demand for chips and, eventually, generate revenue outside that industry.

In the most radical move to date, Intel, Santa Clara, Calif., recently announced that it will pour more than $1 billion over the next few years into a new Internet Data Services unit. The unit will manage computer centers on behalf of Internet-service providers, a hodgepodge of 14,000 companies that connect users to the Internet. Forrester Research Inc., Cambridge, Mass., estimated the business of managing computer centers could grow from $876 million in 1998 to $14.6 billion in 2003, as the service providers choose to rent computing resources rather than buy and manage machines themselves.

The move into computer services, for a company that now churns out hardware products, has been greeted skeptically in some quarters. Rivals such as Exodus Communications Inc., Santa Clara, which already runs more than 9,000 servers for 1,000 Internet service providers, say Intel is shooting from the hip.

"I think it's a stretch for them to say they have some expertise here," said Ellen Hancock, Exodus's chief executive officer. "We've taken years to set up our operations. I'm befuddled that they think this is like building chip factories."

Other competitors with a head start in Web hosting include IBM (NYSE:IBM), telephone companies such as GTE Corp. (NYSE:GTE) and Qwest Communications International Inc. (NYSE:QWST), noted David Cooperstein, an analyst at Forrester Research.

Intel's claim of expertise
But Intel said it has plenty of expertise from running its own Web sites and computer networks. With $8.5 billion in the bank, it also has the cash to spend $50 million to $100 million on each of as many as a dozen regional data centers. Parker said Intel will devise the recipe for a center -- as much as the ever-changing Internet allows -- and then try to stamp them out cookie-cutter style, following Intel's "copy exactly" technique for chip factories. Each center will contain 2,000 to 5,000 computer servers, the high-speed machines that store and transmit Web pages to thousands of users simultaneously.

Companies such as Exodus frequently use a "co-location" strategy, in which the customers buy their own servers and then lease space in Exodus's centers. But Michael Aymar, the vice president at Intel who will run Intel's new business, said that dedicated hardware owned by the hosting company is cheaper for the customer.

Scott McNealy, CEO of server maker Sun Microsystems Inc. (Nasdaq:SUNW), argued that customers won't trust Intel because it will push its own hardware with its services. But Parker said that Intel will set up its data centers according to its customers' wishes, even if that means using equipment from Sun. In turn, Intel will gain valuable knowledge from a "learning laboratory" for how to undertake large computing tasks, said Aymar, who, in turn, will feed information back to Intel's core microprocessor and server design units.

The Internet is a major reason people buy the desktop computers that now use Intel chips. In the future, many of them may be buying new kinds of Internet appliances or running important programs on centralized servers rather than on desktop machines. Knowing where the Internet is headed will be vital to selling chips for those new applications and to begin building service revenue in addition to hardware revenue.

From hardware to services
"Intel understands that the profits in hardware are going to shift as companies start giving away" hardware to entice service subscribers, said John Latta, an analyst at 4th Wave Inc. in Reston, Va.

With so much at stake, Intel's CEO, Craig Barrett, concluded it was vital to reassign some managerial heavy hitters. They include Parker, an executive vice president who ran manufacturing until he was picked to lead Intel's new-business initiatives last June. Aymar, a 25-year Intel veteran who is 51, was also chosen by Barrett after he had voiced a desire for new challenges in a performance review.

"I didn't know who anybody was in this business," says Aymar, who will report to Parker. "I've had to pick it up fast. And I've found it incredibly invigorating."

But the effort is also leaning on younger people. Renee James, the 34-year-old former technical assistant to Chairman Andrew Grove, had been helping keep Grove up to speed on the Internet. James, now the marketing manager for the Internet data-services unit, steered Parker and Aymar to the right people as they interviewed potential customers and staff, and she has helped work on at least two Internet deals.

For the most part, Intel has shied away from buying other Internet service companies, in part because Parker has been appalled at some of their valuations. But he doesn't rule out more acquisitions in the future because time is a scarce commodity as businesses gear up for an electronic-commerce free-for-all.

"Intel is moving on Internet time," said Parker. "And we don't think it is much different from chip time."


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