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Intel makes play for services

Intel details how it hopes to become as dominant a service provider to Internet start-ups and old guard industrial giants as it is chip supplier to the world's PC makers.

Intel today detailed how it hopes to become as dominant a service provider to Internet start-ups and old guard industrial giants as it is chip supplier to the world's PC makers.

Intel unwrapped the first "nerve center" of a new data hosting operation that is the cornerstone of an ambitious plan to expand into a market that, at first glance, appears to be light-years away from the business of making chips.

E-commerce companies and traditional merchants moving online are examining ways to get up and running quickly by outsourcing Web site design, transaction hosting, and data warehousing functions. Intel wants to tap into this trend by getting into the business of running a data factory, of sorts, where all kinds of electronic information is processed.

The goal may not be as easy as it seems. While Intel has excelled at building large quantities of microprocessors that manipulate data, does it really have the wherewithal to turn itself into a service provider?

Mike Aymar "We still want to be the best at supplying PC building blocks. Now we want to focus on what is driving that [growth], which is in the Internet market," said Mike Aymar, vice president and general manager of Intel's newly christened Online Services unit. According to various estimates, the market for data and application hosting services could reach 20 billion by 2003, he said.

Aymar thinks that Intel is already pretty experienced in this area--its employees send and receive more than 2 million emails daily, and it already runs a huge worldwide customer support operation.

Intel has experience in other areas well suited to its new endeavor, said analysts.

"Intel has some significant advantages because it has existing relationships with software developers," said Tom Kucharvy, Internet and online services director for Summit Strategies.

Competitors such as Exodus and AT&T are already in the business of offering what is known as colocated data services--basically, space is rented out in a data center to customers who install their own equipment. Those rivals might have something to say about that. But Intel claims that by eventually providing a variety of pretested applications running on Intel and Sun servers and managing a large amount of equipment for customers more efficiently, it will lower the cost and time needed to keep Web sites up and running.

Intel can do this effectively by working with existing software and hardware developers to ensure maximum performance and stability of applications, said analysts.

"As more and more companies get into those services, it's going to rapidly degenerate into a cost game, with very slim margins where it's going to be wholly based on scale," said Kucharvy. "Intel has the potential to succeed here, but it's not a slam dunk thing."

Ambitious plans for expansion
The extent of Intel's ambitions can be seen in the plans for the buildings themselves. Housed inside a nondescript building near Intel's Santa Clara, California-based headquarters, the 85,000 square feet of space in the first center will someday be occupied by as many as 10,000 servers that will be the virtual home, Intel hopes, of a wide range of the company's Web efforts.

The new $150 million data center is the first of more than 12 centers planned worldwide, including an operation in Virginia slated to open in the first quarter of 2000 and centers in London and Tokyo by mid-year. A facility in Folsom, California, is already operational, and will serve as the testing ground for all other centers. All told, Intel expects to spend $1 billion when the buildings are outfitted to their capacity.

"Intel hasn't built data centers before, but they've built fabrication facilities for chip making and you probably can't get more complicated than that," said Steve Murray, extranet commerce research manager for International Data Corporation.

Making revenue from services
Intel will sell its services directly to large customers, but will also partner with e-business consulting firms such as iXL, Proxicom, PricewaterhouseCoopers, US Interactive, and Razorfish to resell services or simply refer customers to Intel.

In terms of collecting revenue, the company has defined simple per month and per server fee models which scale up as customers use applications such as high-end databases, but in some instances a transaction-based fee might apply. For instance, a company that sells a large volume of items might pay Intel a portion of its revenues for the hosting services. In other cases, Intel would consider taking an equity stake in a company in exchange for services, Aymar said, but it "won't be the bulk of the deals we do."

Among the first customers: Citibank, Excite@Home--which is hosting an online shopping service, Quokka, NEC, eHobbies, and others who declined to be named.

Aymar declined to state how soon the center might become profitable.

Intel will offer two new ad campaigns in support of the new Online Services operation. The first will demarcate Intel's broader "e-business" strategy, while a second campaign will pitch Intel Online Services in trade and industry publications.

Intel's biggest challenge may be adjusting to a different kind of market dynamic, said analysts.

"In the Wintel world, Intel was one of the two guys that held all the power," said Murray. "It's going to be different in this other world. They won't be the eight-hundred pound gorilla where if they move, everyone has to follow."

News.com's Joe Wilcox contributed to this report.