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SGI cozies up to Intel, plans cuts

Silicon Graphics' new strategy calls for closer ties with Intel and also includes plans to cut about $200 million in operating expenses and 1,000 jobs.

Silicon Graphics (SGI) will begin moving closer to chip giant Intel (INTC), SGI executives said today in detailing a plan to revitalize the Mountain View, California, company.

Chairman and CEO Richard Belluzzo described a road map for the company's product lines that

SGI's Rick Belluzzo on the new strategy
includes a strategic relationship with Intel to a group of analysts in New York.

Belluzo additionally told CNET's NEWS.COM that SGI would eventually phase out its MIPS computer architecture and thereby achieve a complete transition to Intel architecture, as previously reported.

Meanwhile, chief financial officer Steven Gomo said the company plans to cut about $200 million in operating expenses in 1999 and will reduce staff by nearly 10 percent through divestitures, streamlining, and other efforts. This would mean reducing head count "by about 1,000 people" from current levels, Gomo said.

SGI employs about 10,500 worldwide, 7,700 of which are in the United States.

The presentation marked the first major announcement from Belluzzo since he was named chief executive of the struggling computer maker in February. Previously head of Hewlett-Packard's (HP) computer business, Belluzzo was instrumental in aligning HP with Intel and adding new product lines based on Intel technology, including workstations.

SGI's Rick Belluzzo on the MIPS phase-out
Belluzzo's intention to move SGI toward Intel while spinning off the MIPS chip architecture proved the highlight of his address. "We will introduce products over the next several years that will continue to leverage the MIPS technology," Belluzzo said. "And we will then have a transition to Intel.

"At some point in time, the Intel roadmap will deliver the kind of performance that it takes to meet our needs over the long term, so we will transition to Intel completely. But there is a long path to getting there," he said in an interview.

Part and parcel of SGI's MIPS phase-out strategy is a timeframe for incorporating standard Windows-Intel PC technologies into the Silicon Graphics product line. Later this year, SGI will for the first time start making workstations that use Intel's next-generation "Slot 2" Pentium II processor, beginning the company's transition from the use of its own processor designs to chip designs from Intel.

In addition, SGI plans to build servers and its supercomputers with Intel processors and related technology. SGI will increasingly focus its server computer business on products for the Web and the media, Belluzzo said.

SGI's new strategy further calls for the company to spin off part of its MIPS microprocessor business.

As for its target markets, SGI will focus its field resources around six industries: communications, energy, entertainment, government, manufacturing, and science. These areas "have common requirements in visual computing and processing massive amounts of complex data," SGI said.

These markets are now worth about $26 billion and will grow to more than $40 billion by 2001, according to SGI.

An expanded relationship with Intel appears to be key for revamping SGI's computer designs and allowing it to push into new markets at competitive prices.

As part of the relationship, SGI will incorporate Intel's IA32 (32-bit) chip technology into its workstation products in the second half of 1998 and port its 64-bit IRIX Unix operating system (OS) to Intel's next-generation IA64 (64-bit) platform, based on the upcoming Merced chip.

SGI will also "engage in joint marketing efforts" to establish new workstations based on Intel chips and Microsoft's Windows NT OS in the marketplace. "Two of the most influential industry brands will cooperate through marketing and public relations activities in the near future," SGI said.

Intel, for its part, is looking to align itself with SGI to alleviate architecture performance issues and to boost its technology for graphics chips, a market it recently entered. One of the bottlenecks in the existing Intel system architecture is moving data from components and main memory to the processor, analysts say.

Intel confirmed today that it has entered into a cross-licensing agreement with SGI but did not specify which areas.

One reason SGI is cozying up to Intel is because its own MIPS architecture has begun to lose its grip on the market. SGI will phase out the MIPS processor used in current workstations and servers probably by 2001 as 64-bit Merced chips from Intel become more pervasive and powerful, as previously reported by CNET's NEWS.COM.

SGI will continue to boost processor speeds and incorporate the chip in its high-end computers, but the last major MIPS release for servers and workstations is scheduled for 1999.

Another leg of the strategy involves spinning off its MIPS subsidiary into a separate company that will design "embedded" processors for handheld devices and game platforms. Under the plan, SGI will hold an 80 percent stake in the new company and MIPS 20 percent, according to sources familiar with SGI's intentions.

The goal is take the MIPS company public within three months. John Bourgoin, president of the MIPS Group, will become the chief executive of the new company, sources added.

But even in this low-cost embedded chip market clouds have already started to gather over the future of MIPS. Sources close to the company say it is struggling to retain a major contract for the next-generation Nintendo gaming machine. In the past, SGI MIPS processors have been the main silicon engine for Nintendo game boxes.

SGI spokeswoman Constance Sweeney declined to comment on the company's MIPS plans or its contract with Nintendo. In 1993, SGI won a joint development and licensing agreement to supply the microprocessor technology, the 64-bit MIPS RISC chip, for Nintendo's 64-bit platform.

Spinning off a MIPS company demonstrates SGI's faith in Intel, but Intel also has a large stake in making its newfound closeness with with SGI work, said analysts. SGI has already developed technology that Intel needs.

"As Intel moves higher in [markets such as workstations]'s reasonable to expect them to develop partnerships that would be complementary. If Intel does everything by itself, it will just slow down penetration [of Intel-based workstations.]," said Peter ffoulkes, workstation analyst with Dataquest.

SGI has developed technology that can quickly move around the huge amounts of data typically associated with graphics applications and could license this technology to Intel. If it wants to compete in the workstation market, "Intel will have to license from all the major 3D technology companies in the industry before long," predicts Dr. John Latta, president of Fourth Wave.

In March 1997, Intel licensed 3D software technology from SGI for producing high-quality color images of 3D objects. Later it acquired graphics chip company Chips and Technologies and invested in 3DLabs. Having access to key intellectual property will ease Intel's entry into the graphics chip market.

Analysts expect Intel and SGI to iron out legal issues as they extend their working relationship, as well. Intel has made a habit of putting necessary legalities in place so there isn't potential for lawsuits in the future, according to Latta.

News of SGI's arrangement with Intel follows on the heels of a lawsuit SGI filed last week against Nvidia that would block the company from making its Riva family of graphics processors.

The lawsuit charges that the Riva processors, used to accelerate 3D graphics on personal computers, infringe upon Silicon Graphics' patent covering high-speed texture mapping in low-priced hardware. Texture mapping, a key technology in 3D computer graphics, plots two-dimensional images onto the surfaces of three-dimensional objects.

Intel is an investor in CNET: The Computer Network.

Reuters contributed to this report.