January 17, 2000

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Inside Intel:
Hosting: The New Goal

By Paul McDougall

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he culmination of Intel's diversification effort is its campaign to become a major provider of hosted applications. In September, the company launched its 500-employee Online Services group--part of a far-reaching strategy that represents Intel's greatest departure yet from its core manufacturing business. Under the plan, Intel will open 12 server farms worldwide by year's end.

The first data center is up and running at Intel's Santa Clara, Calif., headquarters. Intel won't say how many customers it supports, but the center was built to house more than 10,000 servers controlled from a vast, NASA-style command center. Less than one-half of 1% of Intel employees can enter the facility without an escort--a level of security designed to reassure the businesses Intel hopes will trust their operations to its care.

Intel spent $200 million last year to launch the hosting business as a wholly owned subsidiary; it will spend $1 billion to $2 billion more during the next four years to build data centers around the globe, including facilities in Fairfax County, Va.; London; and Tokyo. "I expect this will be a multibillion-dollar business for us eventually," Intel CEO Barrett says.

The centers will be stocked primarily with Intel servers from Dell Computer, but they'll also house servers from rival Sun Microsystems. "Our customers may require Sun," says Michael Aymar, president of Intel Online Services Inc. "The applications they want may only be on that platform, they may have reliability concerns, or they may have a history of working on Sun and that's what they're comfortable with."

Intel's most basic data center offering is what the vendor calls "first-generation" services, where Intel supplies the racks and the customer rents real estate and bandwidth. But Aymar says most clients will prefer Intel's second-generation services. "That's where we provide the real value: the servers, the preconfigured operating systems, and the applications," he says. "We guarantee more than 99% uptime and a maximum turnaround time for any packet request. In theory, all the customer has to worry about is his data." Intel won't break down how many of its customers to date have chosen first- vs. second-generation hosting, and won't provide details about the price of its services.

What the chipmaker will say is that it's aiming its online services primarily at midsize companies looking for a hassle-free entrée into E-commerce. "We're seeing a gradual transition where companies of all kinds are putting their stores and other things that are facing the customer onto the Web, and those need to be on the big pipes," says Gerry Parker, executive VP and general manager for Intel's New Business group, which oversees Online Services.

Intel is limiting its services to managing and ensuring the availability of mostly front-end E-commerce apps. It's leaving application development and services to partners iXL, PricewaterhouseCoopers, Proxicom, Razorfish, and US Interactive, while securing bandwidth from UUnet and Williams Communications. Aymar says Intel is gaining many hosting customers thanks to its relationship with content developers. The Intel Architecture group also houses content-creation teams that are helping to move its hosting efforts forward.

Online shopping portal Excite@ Home worked with an Intel Architecture content-development team on broadband E-business applications for desktops running the Pentium III, as well as on its massive online database of product offerings from merchants such as Amazon.com Inc. Partly as a result, Excite@Home signed on for second-generation hosting services with Intel Online Services; the database runs on Sun servers, but since moving to the data center, Excite has shifted more of its E-commerce apps to Intel servers. "The relationship has made us more aware of the opportunities to use the Wintel platform for front-end applications," says Kris Carpenter, Excite@Home's VP for commerce.

The data center and chip businesses are inextricably linked. Intel's strategy "is to branch out into complementary industries that drive the penetration of the semiconductor," says Robert Rich, Yankee Group executive VP. "To the extent that hosting can drive more computer usage because it gets higher-end capabilities to companies that otherwise don't have the skills to use this stuff, it's tremendously useful to their core business."

By being involved in the development of E-business networks, Intel can also make sure all its chips are optimized for such applications. That's key as it faces more competition in the lower-end CPU business, and as it pits its upcoming IA-64 Itanium chip against proven RISC processors.

At the same time, it's critical for Intel to get beyond products that produce one-time revenue, says Bajarin of Creative Strategies. Intel admits the main reason for venturing into this new territory is that it can make a lot of money. "It's a land grab," says Paul Otellini, executive VP for Intel Architecture. "We think we have as good a chance as anyone." Intel estimates the current global market for hosted and managed services is about $10 billion.

Company officials say they can't hazard a guess as to how much of that market Intel will ultimately win. "The confusion is, how much of that is going to be application hosting, straight hosting, or just reselling bandwidth?" Parker says.

Autobytel.com Inc., the online car merchant, knows what it wants: a hosting partner to help it exploit broadband's potential to deliver interactive, 3-D shopping, and meet its aggressive expansion goals. It's mulling a decision to enlist Intel as that partner.

This would be a huge win for Intel's nascent hosting business. Almost half of U.S. online car sales are conducted through Autobytel, which also handles 38,000 purchase requests per month in Japan. Last year, it went live in the United Kingdom and Sweden.

"Having hosted sites will be critical to continue that kind of international expansion," says David Grant, Autobytel's chief technology officer. "We don't want to build our site over and over again and build a data center each time we open in a new country."

Still, Grant says he has a lot to think about before deciding whether Intel will get his hosting business. He says he'll commit to a vendor toward the end of the quarter.

That Intel doesn't have a lock on Autobytel's business--even though the company runs on Intel servers--hints at some of the obstacles Intel faces in a field that's attracting entrants from all corners of the technology industry. While Intel's past success has come largely through its manufacturing prowess, many players in the hosting market are emerging from industries with longstanding service traditions--and that may be key to a market that calls for high levels of customer service. The telecom giants, for instance, have already mastered efficient and accurate monthly billing, formal mechanisms for dispute resolution, and call-center operations. They also know how to create highly available networks across vast geographic areas.

Intel executives concede the point. "But our view is that we can provide the capability and learn the service stuff along the way," says Otellini.

Perhaps. But Intel will also face competition from companies that specialize in providing applications, such as Exodus Communications Inc. With more than 1,700 customers and 19 data centers, Exodus says it's not concerned about the brawny newcomer. "How long will it take them to build capacity, understand how to scale it, and create services?" says Sam Mohamad, Exodus' executive VP for worldwide sales. He says Intel's cash reserves won't make up for lack of experience as a service provider. "We've gone through all that you need to go through to do this successfully; money is usually the least of your worries in this market."

Intel also doesn't seem to have worked through all the issues involved in maintaining data its customers' depend on. For instance, it hasn't set up a fully mirrored remote site where its users' hosted data is backed up in real time. Customers admit that's troubling. "We've been working with them to address some of the concerns we have on that front," says Excite@Home's Carpenter. "But I don't think they're there yet."

Despite the challenges, Intel says the technologies and processes it developed in building its own E-commerce network will readily transfer to a services business. Analyst Bajarin agrees that Intel has the knowledge: "They know how to do servers because they have one of the most sophisticated server labs in the industry. From the standpoint of creating server farms, they have more than enough talent to do so successfully."

Intel has shown the ability to adapt to changes in technology and market conditions--a trait that should serve it well in its efforts to become the building block for the Internet economy. When rivals such as Advanced Micro Devices Inc. and Cyrix Corp. appeared, Intel responded with its own low-cost chips. When the company experienced a public relations disaster in 1997 after shipping a flawed Pentium chip, it vowed never to repeat its widely criticized efforts to trivialize the problem--and it hasn't. Those who doubt Intel's vision may also do well to remember that when it debuted its first microprocessor in 1971, there was no such thing as a PC.

INSIDE INTEL

Chips Come First

Back-End Push Heats Up

Networking Gains Ground

Hosting: The New Goal

Intel In The 21st Century

Intel: The R&D Strategy

Interview: Craig Barret, CEO of Intel

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