By Melanie Austria Farmer and Joe Wilcox; special to ZDNet News . . .

In a major boost to Intel's Itanium chip, Compaq Computer will license its Alpha chip technology to Intel and will use Itanium in its servers as the PC giant looks to consolidate its operations to focus on software and computer services.

Intel, through the Alpha deal, will gain valuable intellectual property from Compaq for use in its chips and a major customer for its Itanium processor. As part of the deal, Compaq will eventually transition all of its server systems to use Itanium processors.

“We are standardizing on the Itanium family of 64-bit” processors, Compaq CEO Michael Capellas said during a news conference Monday morning. “This is going to be one-microprocessor architecture under our entire server line.”

Financial terms of the deal were not disclosed. The companies said the deal is a nonexclusive licensing agreement. Intel will hire the majority of Alpha engineers, some of whom will remain at Compaq until they complete AlphaServer projects now under way. No layoffs are expected as a result of the deal, a Compaq executive said.

Compaq will transfer the majority of its Alpha development tools and engineering resources to Intel, which also will be granted licenses to use Alpha processor technology and compilers.

As part of the agreement, Compaq said it will move its entire line of 64-bit servers to Itanium microprocessors by 2004. The deal, however, will not prevent Compaq's releasing its long-anticipated, next-generation Alpha processor known as EV7. The company also will continue designing and building NonStop Himalaya servers, which use MIPS chips, until 2004.

For Intel the deal is “obviously a major victory in the sense that…eventually all Compaq's 64-bit stuff will be Itanium-based,” said Nathan Brookwood, principal analyst at Insight64.

Brookwood said Compaq “could have kept (Alpha) going, but at least here they're going out in a very orderly manner, which benefits everybody. It's sort of a death with dignity” for Alpha.

Intel CEO Craig Barrett said in a news conference Monday morning that the Alpha technology won't affect Intel's “silicon chip technology for a few years. Probably the area where it will have the more immediate impact is compiler technology and using some of the compiler expertise that Compaq currently has to put that to greater parallelism to our product's multi-threading capability.”

Gartner analyst George Weiss said with the additional technology and commitment from Compaq, “Intel becomes empowered and will progress up the food chain quicker as it gets the talent and the engineering resources working on Itanium, not only from Compaq but also HP.”

Hewlett-Packard has already said it will phase out its high-end chip architecture in favor of Itanium chips.

Compaq also agreed to port its Tru64 Unix, OpenVMS and NonStop Kernel operating systems to Itanium. At the same time, Compaq and Intel agreed to jointly develop future high-end computing products.

Capellas rebuffed concerns that the deal could raise regulatory issues. “We've obviously looked at it pretty carefully, and we don't believe there are any regulatory roadblocks that may fall,” he said. “Quite frankly, this is nonexclusive, so we believe this is just an extension of competition in the marketplace.”

Barrett echoed Capellas' sentiments, noting that Intel had “no discussions with anyone in the Bush administration.” He reiterated that it is “a nonexclusive arrangement. We're getting a license for Compaq intellectual property.”

Originally designed by Digital Equipment, the Alpha chip for years was considered an example of state-of-the-art technology that few people wanted to buy. The chip, and servers based on it, won a dedicated core of customers that remained small in number.

Compaq acquired the chip as part of its purchase of Digital in 1998.

Compaq looks to services

The deal is part of a larger plan by Compaq to offset sluggish PC sales and a slowing economy by moving away from hardware and focusing its efforts on software and services.

In an internal memo to employees dated June 12, Chief Executive Michael Capellas outlined a new strategy to transform Compaq. Calling it a “major shift” for the company, Capellas said the goal is to make Compaq “the leading IT solutions provider,” zeroing in on a way to deliver software, products and services to its customers.

Wall Street analysts have been expecting some sort of restructuring from Compaq. And at investment conferences, Capellas has said the company will begin to focus more on services.

Compaq's new approach mirrors what IBM has done for years as one of the largest services organizations in the industry with its own operation, IBM Global Services. IBM expects high-single-digit sales growth and double-digit earnings growth in the current fiscal year, which will primarily be driven by its booming services business. About half of Big Blue's total revenue growth from the first quarter came from services.

The company intends to make the changes over the next 180 days and plans to develop a “solutions organization” dedicated to the new strategy, according to the memo, obtained by CNET News.com.

The division will initially help customers in the telecommunications and financial services industries, but eventually Compaq will target companies in health care, life sciences, media and manufacturing.

After its failed bid last month to acquire Net consulting company Proxicom, Compaq has said its mission is to continue seeking out acquisitions to quickly grow its services side. In the memo, Capellas noted that Compaq has allocated $500 million for these acquisitions.

As part of the transformation strategy, Compaq also plans to reduce structural costs by $200 million per quarter, which includes a 20 percent decrease in manufacturing costs by the end of the year.

“Our goal is to increase services from about one-fifth of Compaq's revenue today to one-third of total company revenue during the next three or four years,” Capellas wrote in the memo. “To get there, we will need to grow about 40 percent per year through a combination of internal growth, acquisitions and increased software sales.”

ZDNet News staff writer John G. Spooner contributed to this report.

 
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