Xeon undermines the Gods

Intel's newest processor is giving its server and workstation rivals the willies. Despite a price considered hefty in the PC industry, the Xeon manages to undercut its well-heeled competitors.

"When you look at the performance and the price of Xeon-based systems, it certainly beats other processors," said Alex Yost, spokesman for IBM's Netfinity group. His company also manufactures the PowerPC -- used in Macs and high-end servers and workstations.

Looking for a piece of the PC server and workstation pie, Compaq, Hewlett-Packard, and IBM turned out at the Intel event, despite the fact that the three companies make processors that will most likely be undermined by Intel's Xeon. Even Sun whose UltraSPARC II processor will lose share to Xeon, was pushing its Solaris operating system at the event.

The Xeon uses today's fastest Pentium II core -- clocking in at 400MHz -- adding on top of that faster access to larger memory caches. A 400MHz Xeon processor with a 512KB cache (the same as a Pentium II) will cost about $1,200 (£731) while the 1MB version will weigh in at over $2,800 (£1,707). Despite the un-PC price tag, industry watchers think the processor is a good deal. "We intend to deploy hundreds, if not thousands, of these servers in our networks," said Milo Medin, vice president of broadband Internet provider @Home Network during a video testimonial. "That makes the (Xeon's) price-performance important."

According to Intel, a $7500 (£4,573) Xeon-based workstation can beat the performance of systems based on Compaq's, Sun's, and HP's processors which cost more than three times as much. "This is not an isolated example," said John Miner, vice president and general manager for Intel's enterprise server group. "We can top the performance of proprietary architectures and best their price." Intel's aim: develop the workstation and server markets into high-volume, high-margin businesses. A necessary step to make up for the relative austerity of the sub-$1,000 PC market. "Businesses with basic tasks, like e-mail and e-commerce, will eat up the Intel [Xeon] processor," said Nathan Brookwood, industry analyst with market researcher Dataquest. "And that's where the volumes and margins are." Brookwood estimates that revenue in the PC market will only grow 1 percent per year for the next five years.

Thus, Intel has to look to other markets. Driven by the Internet and entertainment, PC server and workstation sales are expected to explode over the next few years. According to numbers from market researcher International Data Corp, sales of workstations based on the Intel architecture increased 62 percent annually between 1995 and 1997; Intel-based servers sales grew 43 percent per year in the same period. "That's the economy of scale of the PC architecture at work," said Intel's Miner.

Computers based on other processors had a harder time. During the same period non-Intel workstation sales shrunk 5 percent per year, while servers grew, but slowly, at 13 percent annually. Dataquest's Brookwood agreed with the numbers. "We see the trend continuing," he said. And that spells trouble for makers of alternative processors. With the MacOS porting to Intel and sales hurting, IBM's PowerPC processor could be in trouble. The PowerPC, jointly developed with Motorola is used in computers from the basic Macintosh to 256-node supercomputers.

Compaq is in the firing line as well. With its acquisition of Digital, the computer maker now also makes the technically savvy Alpha processor -- a chip that has won kudos but not market share. The company intends to keep pushing Alpha, however, even while selling Intel-based computers. "NT-based systems using Alpha will be competitively priced," said John Young, director of product marketing and business operations for Compaq's server division.

Perhaps the saving grace of the systems is their ability to "scale" or increase in power from a single-processor system to one with 64 processors, or even 512 processors in the case of IBM's PowerPC. Intel's Xeon can only use 4 processors in a single computer, barring it from high-end number crunching tasks.