Roel Pieper, the new president of Tandem Computers Inc., has seen the handwriting on the wall. After 22 years of creating the most sophisticated hardware and software for managing zillions of transactions--tracking trades on the New York Stock Exchange or billing for AT&T's long-distance business--Tandem is about to bet the farm: It will scale back development of proprietary operating-system software and hardware designs. Instead, it will build computers around handy prefab parts from Intel Corp. and Microsoft Corp.--just as personal-computer makers do.
Such a move has been anathema to Tandem and other makers of midrange and high-end computers--who never thought they would have to make it. But new building-block technology from Intel and Microsoft is about to bring the economics of the PC market to every corner of the industry. After years of stagnation and a $22 million operating loss for the quarter ended Dec. 31, Tandem's board is convinced that the company's only hope for a turnaround is to adopt the new business model early. The plan: Start cranking out cheap midrange computers using multiple Intel microprocessors and Microsoft's Windows NT operating system. Then, freely license Tandem's unique fault-tolerant technology to all comers.
"UP AND UP." Get ready for Wintel: The Sequel. In PCs, Wintel machines--clones using Intel chips and Microsoft Windows--dominate. Nearly 90% of the desktop computers shipped are Wintel systems. Now, Intel and Microsoft have a new generation of technology to aim higher. Their new building blocks will let computer makers create inexpensive servers that will pack enough power to run multinational corporations, global computer networks, and massive data centers. Intel and Microsoft will "move up and up and up," Pieper says. "There's no doubt in my mind this will happen."
It won't happen overnight, though. Before the new servers take on the biggest computing jobs, they will have to prove they are as reliable as the machines doing them now--computers whose designs have evolved over decades of use. NT must also be proved. Now, for example, it lacks security features that IBM mainframe customers take for granted. And the Intel/Windows NT combo can't match conventional "big iron" in handling large numbers of transactions--and may not do so for two years. That, according to Anil Gadre, vice-president for worldwide marketing at Sun Microsystems Inc., will give the incumbents time to grab more market share. "NT is far from being the inevitable choice of the corporation," he insists.
But the trend is unmistakable. The Wintel juggernaut has already got up a head of steam in the first segment above the PC market. Today, Intel-based machines account for 63% of network servers produced, according to market researcher International Data Corp. These systems, usually souped-up Wintel PCs with lots of extra disk storage, are used to anchor departmental networks of desktop computers and printers. By 1998, 75% of the servers sold will have Intel inside.
The next step will be the arrival of systems built around an Intel circuit board that incorporates four of the chip giant's new Pentium Pro microprocessors. Just as Intel motherboards helped Dell, Packard Bell, and Gateway 2000 beat IBM and Compaq to market with Pentium-based PCs, the Pentium Pro board could instantly put scores of players into the midrange and high-end computer business. A server built around a single four-chip Pentium Pro board is expected to deliver the power of a $1 million server but at half the cost. By putting multiple boards into a system, computer makers can build high-end servers, rivaling the largest mainframes. Sequent Computer Systems Inc., for example, is building a massive server that can use up to 63 Pentium Pro boards.
NO SAFE HAVENS. Computer makers who once felt their unique technology kept them above the fray may soon start doing the math that compelled Tandem's Pieper to jump on the Wintel bandwagon. The new Intel boards and NT will pull down barriers to entry in the higher ranges of the computer market. And since newcomers won't have to do much of their own research and development, they'll drive down prices. Margins will plunge from the 40%-to-55% range that companies need to support R&D for proprietary technology. That could put the squeeze on Digital Equipment Corp., for example. Digital makes its own Alpha chips, which are still more powerful than single Pentium Pros. If DEC must slash prices, it may have trouble maintaining the Alpha investment.
Hardly any segment is safe. At Chen Systems, the Eau Claire (Wis.) startup formed by the supercomputer designer Steve Chen, engineers are working on a Pentium Pro design. Chen, who spent years trying unsuccessfully to design a world-beating supercomputer using dozens of custom chips, is convinced he can get top performance by combining the commodity building blocks. The current Chen-1000 uses eight 166-megahertz Pentium processors and costs $243,000. It delivers 50% of the power of an AlphaServer 8400 from DEC, which costs $1.1 million. That's half the performance for under one-fourth the price. Says Chen: "There will be a new generation of commodity-based machines that will replace the minicomputers and mainframes of today."
That's bad news for mainframe companies such as IBM, Amdahl, and Hitachi, which have already lost ground to increasingly powerful midrange Unix systems. Now, they could find themselves under attack from a new crop of Wintel competitors. And--small comfort--so will the companies that launched the Unix assault, including Sun Microsystems and Hewlett-Packard Co. "The Unix marketplace is going to get clobbered," says Peter Lowber, an analyst at Datapro.
No wonder computer makers ranging from IBM to HP are joining Tandem in adopting the new technology. "Intel servers are the new building blocks for the industry," says J. Thomas West, senior vice-president at Data General Corp. With Intel technology, Data General claims it can sell computers for half the price of some competitors. Intel servers, says West, "will push PC economics into large-scale computing and do for the data center what Intel has already done for the desktop." "CAN'T FIGHT IT." For its part, the chipmaker says it's simply doing what comes naturally--helping customers create the biggest possible market for a new Intel chip. If that means turning midrange computers into a mass market with PC-industry economics, so be it. "You can't fight it," says David L. House, a senior vice-president. "People who try to fight the tide will suffer."
Microsoft is working to make Windows NT inevitable, too. The NT server operating system is rapidly evolving into a "serious" operating system and gaining popularity in Corporate America. NT is already a clear and present danger for Novell Inc., whose NetWare is the leading software for running basic local-area networks.
Now, married to speedy Intel hardware, NT is set to challenge Unix, the most popular operating system for midrange computers. Microsoft has convinced companies such as SAP America and Computer Associates International to adapt their mainframes and minicomputer packages for NT. Database king Oracle Corp. also offers programs for NT. Microsoft has a compelling sales pitch: If you write for NT, your product will run on scores of computers. If you write for Unix, you must customize the software for every machine--because no two Unix systems are alike. Another factor: Shipments of all forms of Unix grew by 12%, to 517,000 copies last year, while NT sales quadrupled, to 413,000, says IDC.
The growth is occurring in a huge sweet spot in the market--where Unix servers have been selling briskly into the corporations that want to downsize from mainframes. These customers, says Anthony A. Ibarguen, executive vice-president at Entex Information Services Inc., a Rye Brook (N.Y.) computer reseller, may be surprisingly eager to start buying larger systems the way they now buy PCs. "Does it really matter to customers that it says IBM or Compaq outside--or is it Wintel inside they care about?" he asks.
NEW SHAPE. Customers are already kicking the tires on Pentium Pro prototypes. Texaco Inc. is testing servers from Data General, running Oracle databases on NT. Ed McDonald, chief architect for Texaco, says he's less excited about cost savings than about how he can use NT to simplify his life. If all sorts of computer makers sell NT-based gear, he can make his selection on more important criteria than price and performance. "We won't make the decision on price, because we don't expect that much difference," says McDonald. "We'll make it instead on service: Who has service organization that can perform in mission-critical solutions?"
In a few weeks, the new midrange and high-end market will start to take shape. IBM, HP, Compaq, and Dell plan to introduce servers built around the Intel Pentium Pro boards. Compaq Computer Corp., the leader in PC servers, is bound to be particularly aggressive. "This will place us in the heart of the traditional midrange," says Gene Austin, vice-president for marketing at Compaq's Systems Div.
To make sure NT is up to the job, Microsoft is negotiating with computer makers to get technology to beef up the operating system. Tandem software for running multiple processors and handling complex transactions would help. Both companies decline to comment on a deal. Microsoft is already working with Digital and NCR for technology that will make NT work in large-computer installations and is developing transaction processing software on its own.
Will that carry Wintel machines into the heart of mini and mainframe territory? Yes and no. As the slowdown--rather than sudden death--of mainframe sales has proved, it's hard to kill an entrenched computing technology. But the low-cost power of the new technology can't be ignored. The answer, says Richard C. Watts, general manager of HP's computer-products organization, is that the old and new "will have to learn to coexist." Peacefully?