SeaMicro Aims for Startup Stardom With Old-School Innovation

In Silicon Valley, where startups race to create the latest smartphone application, game or social network, SeaMicro Inc. is thriving by focusing on a more mundane task: building servers.

The company is designing computers that require less space and power than conventional machines yet perform just as well. The idea is to fill a gap left by Hewlett-Packard Co. (HPQ) and Dell Inc. (DELL), which have curtailed research and development, SeaMicro Chief Executive Officer Andrew Feldman said in an interview.

“We stepped into a market that isn’t very good at R&D and isn’t very good at innovation,” said Feldman, whose company began shipping its first products a year ago. “They became supply-chain companies. They stopped doing engineering.”

SeaMicro is focusing on the type of servers used by Facebook Inc. and Google Inc. (GOOG) to provide so-called cloud services over the Internet -- a market that will almost double by 2015, according to IDC. By producing machines that uses a quarter of the power and a sixth of the space, SeaMicro has seen sales boom, said Feldman, 42. While he declined to give revenue figures, Feldman estimates that SeaMicro set a sales record for a Silicon Valley computer-hardware startup in its first year of shipping products.

The company recently hired its 100th employee and has moved into a bigger space in Sunnyvale, California. The new headquarters is a sea of gray cubicles -- many yet to be occupied -- an environment more reminiscent of Silicon Valley pioneers like Intel Corp. (INTC) than dot-com startups.

Giant Rivals

Maintaining SeaMicro’s growth will hinge on whether the big server makers, including Hewlett-Packard and Dell, pursue the same innovations, said Jeffrey Hewitt, an analyst at Stamford, Connecticut-based Gartner Inc. The company has made strides in streamlining the way processors work together, helping SeaMicro carve out a niche for itself, he said.

“The jury is still out as to whether HP and Dell are asleep at the wheel,” Hewitt said.

The market for SeaMicro’s servers is still in its early stages, he said. As it grows, Hewlett-Packard and Dell may place more emphasis on it, Hewitt said.

Jim Ganthier, a vice president of Palo Alto, California- based Hewlett-Packard, said his company isn’t worried about SeaMicro. Hewlett-Packard has projects in place that will create more efficient machines, he said. SeaMicro will remain a small player with niche technology, he said.

‘On an Island’

“They’re going to be left on an island with their shiny little box,” Ganthier said.

Even so, Hewlett-Packard’s research budget is smaller today as a percentage of sales than it was 15 years ago. The company spent 2.6 percent of revenue on R&D in the most recent fiscal year, down from 7.1 percent in fiscal 1996.

Dell, meanwhile, says it’s also exploring new technologies. It “spends a ton of time talking to customers” and builds products that cater to specific needs, said Steve Cumings, who handles marketing for data centers at the Round Rock, Texas- based company. Dell also resells some SeaMicro servers, making the companies partners and competitors.

“We’ve been very successful in the market,” Cumings said. “We look at a lot of new technologies.”

Dell spent 1.1 percent of revenue on R&D in the last fiscal year, versus 1.8 percent 15 years ago.

SeaMicro was founded in 2007 with investments from Khosla Ventures, Draper Fisher Jurvetson and Crosslink Capital Inc. The company’s customer list includes Skype Technologies SA (MSFT), EHarmony.com Inc., Nippon Telegraph & Telephone Corp. and France Telecom SA. It also serves all of the major companies that use data centers to provide cloud services, Feldman said.

Design Innovation

SeaMicro’s biggest innovation is its chip design, he said. The company’s application-specific integrated circuit, or ASIC, replaces as much as 90 percent of the separate components on a server motherboard and links the processors together.

SeaMicro servers rely on Intel’s Atom processor -- a chip designed for battery-powered devices. That means it doesn’t require a lot of electricity. The processor isn’t one of Intel’s more powerful products, though by using a lot of them, SeaMicro can get the necessary performance with less power.

Often the servers are handling simple tasks, such as delivering e-mail or a Facebook page. The big computer makers haven’t adapted to this world of cloud services, Feldman said.

Instead of buying powerful computers designed for the complex needs of a few internal users, cloud-service providers want servers to handle millions of customers. That means they want a much bigger array of cheap, efficient machinery, he said.

“The nature of the work changed,” Feldman said. “It changed from a small number of users to many users, and from hard problems to easy problems.”

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Andrew Feldman, chief executive officer and co-founder of SeaMicro Inc., stands for a photograph at the NBS Design... Read More

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Employee Hwa Lee inspects circuit boards for SeaMicro Inc. at the NBS Designs Inc. facility in Santa Clara, California. Close

Employee Hwa Lee inspects circuit boards for SeaMicro Inc. at the NBS Designs Inc. facility in Santa Clara, California.

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Server banks stand at SeaMicro Inc. headquarters in Sunnyvale, California.

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Employee Hwa Lee inspects circuit boards for SeaMicro Inc. at the NBS Designs Inc. facility in Santa Clara, California. Close

Employee Hwa Lee inspects circuit boards for SeaMicro Inc. at the NBS Designs Inc. facility in Santa Clara, California.

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Employee Thuy Vo solders wires to circuit boards for SeaMicro Inc. at the NBS Designs Inc. facility in Santa Clara, California. Close

Employee Thuy Vo solders wires to circuit boards for SeaMicro Inc. at the NBS Designs Inc. facility in Santa Clara, California.

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