Intel's $200 million investment yesterday in Williams Communications is the chip giant's first tangible step toward becoming a Web hosting firm, a new market in which the company hopes to apply the strategies that have helped it become a successful semiconductor manufacturer.
The stake effectively puts the leading chipmaker's money where its mouth is, and helps clarify a vague data services strategy that Intel announced in April.
The recent trend toward outsourced corporate services and huge growth in data services makes Web hosting and development an attractive growth market, even for a chipmaker. Market research firm The Yankee Group expects the U.S. Web hosting business to grow from an industry valued at $4.4 billion this year to one worth $14.4 billion in 2003.
"[Intel is] a highly competent company that's capable of moving quickly," said Steve Murray, an Internet analyst at International Data Corporation. "I don't think they're late to the party. The data center market is not going to be locked up over the next 18 months." Murray expects the market to be worth $10.7 billion in 2002.
Intel is expected to invest in Williams Communications following the firm's previously announced initial public offering. Williams Communications, a unit of the Williams Companies, is expected to go public in late June or early July under the direction of Solomon Smith Barney.
As part of the deal, Williams, a telecommunications carrier in the process of building a state-of-the-art fiber-optic network, will provide network connectivity for Intel's new Internet Data Services facilities, essentially Web hosting centers.
Intel hopes years of learning about bunny suits and clean rooms in the semiconductor business will attract companies that need a third party for Web hosting.
"It may seem interesting for a chip company to get into Web hosting, but we think there's a lot of underlying commonalities that will benefit us," said Robert Manetta, an Intel spokesman.
Doing what it does best
Intel is expected to use many of the precision techniques it has developed in its worldwide semiconductor factories in its new Web hosting facilities. The company expects to have three hosting facilities--calling them "bit factories" or "server farms"--this year, with the first one to open in Santa Clara, California, in September.
Intel's strategy hinges on taking its "copy exact" methodology that lays at the core of its chipmaking strategy and deploying it in the new data services business.
Under copy exact, Intel develops the methods and processes for making a certain chip at a single manufacturing plant. Once the process is honed--where wasted effort is low and product output is high--Intel replicates the manufacturing method in several plants around the world. In the end, copy exact helps the company maintain levels of quality, but also allows it to pump out huge volumes of chips in relatively quick order, observers say.
"Their factories are clones of one another," said Nathan Brookwood, a consultant at Insight 64.
The methodology generally applies to semiconductor equipment. But whether the company can take this process and translate it to a service business remains to be seen.
Some competitors and analysts are unwilling to bet against the semiconductor giant.
"Intel entering the space does have an element of endorsing the whole space," said Ellen Hancock, chief executive at Exodus. "I think the area is large enough that we can all focus on what we do best."
"Everyone in the industry respects the Intel name and what they do," Hancock said, noting that her Web hosting firm targets a higher-end corporate customer seeking hands-on access to Web servers. "For those companies that Intel will compete with directly, they'll need to really pay attention to Intel and find out what their differentiators are."
Intel also will offer Web development services under its new Internet content services division. The company has pushed creative Web content for years as a way to drive demand for its processors and will now charge money for its efforts, Manetta said.
Intel plans to sell its data services in a wholesale fashion, according to Paul Otellini, general manager of the Intel Architecture Business Group. That is, the company will market its services to ISPs and local telephone companies, which in turn will market these capabilities to e-commerce companies. Otellini, however, said occasions will come up where Intel sells its services directly to customers.
Intel's server farms and services will be used to promote Intel technology, but the company will be relatively agnostic, Otellini added. If customers need to connect to Sun Microsystems' Solaris servers, Intel will do it, he said.
Intel does not intend to venture into the application service provider arena, a growing area in which many ISPs and telcos will host applications, such as enterprise resource planning software, for businesses, Manetta said.
"They see that the world is moving out to the network," said IDC's Murray. "More networks mean more devices, which means more chips, so it's all good for Intel."