Goodbye To The Chip Of The Future?

When Intel (INTC ) and Hewlett-Packard (HPQ ) released the Itanium server chip they had jointly developed three years ago, detractors quickly labeled it "the Itanic." Delivered two years late and at a cost of $2 billion, the chip was billed as the future of computing because it could process data 64 bits at a time, twice the amount of other chips. But Itanium performed poorly on its maiden voyage, chewing through data even more slowly than Intel's own 32-bit chip. Potential customers gave it a chilly reception, especially because so little software could take advantage of its 64-bit capabilities.

On Feb. 17, Intel Corp. Chief Executive Craig R. Barrett sank Itanium's last hopes for gaining broad success. He announced that Intel will reconfigure its own 32-bit chips, the Xeon for servers and the Pentium 4 for desktops, so that by midyear they also will be able to process 64-bit software. With Intel throwing its weight behind other products that can handle 64-bit applications, Itanium looks doomed to niche status.

The Itanium experience is a timely reminder of how Intel's culture may make it challenging to expand into new markets. The company's forays into consumer electronics and communications depend on its ability to cooperate effectively with other companies. But Itanium is a symbol of the go-it-alone arrogance of the company's past. When Intel was developing the chip, critics outside and even inside the company said it was unreasonable to require software companies to rewrite millions of lines of code so their software would run at 64 bits. Indeed, that became a critical flaw. Although Intel is showing signs now of becoming more humble, such miscues mean it will have to work hard to win over potential customers.

No question, Barrett needed an alternative to Itanium. Last April, rival Advanced Micro Devices Inc. (AMD ) began selling its Opteron server chip, which can handle both 32-bit and 64-bit applications. The flexibility helped Opteron grab 3.9% of the mainstream server market by December, according to researcher IDC. "It's not 64 bits that most people want right now. It's performance and value," says Peter N. Glaskowsky, editor in chief of Microprocessor Report.

Even Hewlett-Packard Co. is hedging its bet on Itanium. On Feb. 24, HP revealed that it will begin selling servers with AMD's Opteron alongside Intel's products. Chief Technology Officer Shane V. Robison says HP's relationship with Intel is "the deepest partnership in the industry" but adds that customers have been demanding more choices in the servers they buy.

How did AMD outmaneuver Intel? The plucky underdog bet that existing chip technology would continue to double its performance every 18 months -- just as Intel co-founder Gordon E. Moore had predicted in what became known as Moore's Law. Although Intel also believes in Moore's Law, it felt the Itanium architecture would be superior. AMD's gamble paid off. In the 10 years since Intel announced it would develop chips for 64-bit applications, 32-bit chips have grown to account for 91% of the server market.

Now Intel is making up for its misstep. It still holds 96% of the mainstream server market, according to IDC. And by adding 64-bit extensions to its Xeon line, it has the option of starting a price war if AMD makes more headway with corporate customers. The move helped keep Dell Inc. (DELL ), the world's second-largest server seller, from defecting to AMD by giving it a 32- and 64-bit product to sell against Opteron offerings from Sun Microsystems (SUNW ), IBM (IBM ), and HP. Dell President Kevin B. Rollins says his company has no plans to use AMD chips.

By developing an alternative to Itanium, Intel looks plenty capable of defending its server dominance. But the chip of the future doesn't have a very bright one.

By Cliff Edwards in San Mateo, Calif.

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