Should it go through, Digital, a company that was once one of the largest vendors of Unix software and non-Intel hardware, will become a subsidiary of the world leader in sales of Windows-Intel computers.
The agreement is less strange than ironic: Digital employs the largest field force of certified Windows NT professionals. Its acquisition by Compaq effectively means there will be a merger between the product leader and one of the service leaders.
The result of this consolidation, say many, is that the economies of scale will further tip toward Intel and Microsoft, making it even tougher for companies like Sun to match that platform in terms of research and revenue.
Of the two, Intel may be the biggest beneficiary since it needs the economies of scale more than Microsoft to finance the huge budgets which drive its chip business. "The economies of scale become more and more skewed toward Intel," said Ashok Kumar, semiconductor analyst at Loewenbaum & Company.
Moreover, the significance of these economies will increase in the future. Every new generation of processors costs two to three times more than the previous generation of chips to develop, in addition to the multibillion-dollar cost for chip plants. Competing technologies such as Sun Microsystems' Sparc, Silicon Graphics' MIPS, and Hewlett-Packard's PA-RISC architecture may be able to maintain some performance advantages, "but this will be harder and harder to justify" as development and manufacturing costs skyrocket.
Intel, on the other hand, can use its revenues from an ever-expanding base of the world's largest computer vendors to finance massive research and development budgets and the multibillion dollar chip plants.
In addition, Intel's next-generation 64-bit Merced chip will likely eliminate the performance advantage enjoyed by Sparc and other chips, and become the last nail in the coffin for many, if not all, competing technologies, according to analysts.
One of the key issues to watch in this regard will be what happens to Alpha, Digital's 64-bit processor technology, which forms the core of that company's high-end server technology. Digital had been moving away from its commitment to Alpha for some time, said many. Late last year, it transferred its chip fabrication plant to Intel in a far-reaching legal settlement, and agreed to support Intel's upcoming Merced platform.
The merger with Compaq will likely only accelerate that process, speculated Chris Christiansen, an analyst at International Data Corporation.
While Compaq and Digital executives have said that the combined companies will stand behind Alpha, others believe that the support will be lukewarm. Alpha will exist as a viable platform, but probably not continue to grow.
The upshot: This may also point to the ultimate fate of other non-Intel platforms that simply can't keep up in terms of technology, the number of users, and development costs.
"Will they be able to grow revenues on it [Alpha server lines]? Probably not. Momentum will shift to the 'Wintel' camp with the appearance of Merced," said Kumar. Wintel refers to the computing platform based on Intel chips and Microsoft's Windows operating system.
"It's certainly not going to help Alpha," added Joe Barkan, research director at Gartner Group. "It will continue to be supported. It will continue to be produced, but it does not strengthen it, especially in the NT market."
On the Microsoft side, the deal will likely result in an incremental boost for Windows NT because it creates a large, multinational computer vendor seemingly dedicated to the promotion of the platform.
"I believe that the true asset in Compaq's acquisition is Digital's Multivendor Customer Service (MCS) unit," said Christiansen.
MCS was one of the first large integration organizations to embrace NT as a strategic platform. The division now boasts approximately 1,600 certified NT technicians, more than any other consulting organization.