If Intel commits more resources to this area and AMD is not a major threat will Rambus be implemented as urgently as we all hope?
Inside Intel: Is Internet hosting its ticket to continued growth?
By Deborah Gage, Sm@rt Reseller
June 24, 1999 5:15 PM ET
No question it's a chip giant. And a motherboard king as well, for that matter. But an Internet-hosting company that runs enterprise apps for your customers?
After years of searching for a major, new growth area, Intel Corp. believes it finally has found one. Recently, the components behemoth surprised Wall Street by announcing it was entering the data-services business in a big way -- even though it earns more than 95 percent of its revenue from processors, chip sets and related products.
The message is clear. Intel will build huge data centers and provide information processing, storage and other computing services for resellers that connect customers to the Net. Intel plans to jump-start the new business this fall, expanding across the United States and into Europe by early next year, and around the world the year after.
Several members of Intel's top brass -- including executive Vice President Paul Otellini, rumored to be on Hewlett-Packard Co.'s shortlist of CEO candidates -- expanded on the Internet-hosting strategy during recent meetings with Sm@rt Reseller at the company's Silicon Valley and Pacific Northwest offices.
A crucial time
Among the revelations: Intel Senior Vice President Sean Maloney sees VARs increasingly colliding with ISPs, as both groups scramble to sell networking equipment and services. "We are structuring our channel programs to fit those groups, in the full knowledge that in three years' time the channel will be radically different from where it is now," Maloney says.
Clearly, Intel wants ISPs and resellers to work side-by-side on its hosting initiative -- which comes at a critical time for the chip giant. With the worldwide semiconductor market just now emerging from a profound three-year slump -- last year the industry's revenue dropped 8.4 percent to $125.6 billion -- Intel has been moving behind the scenes to reinvent itself.
"What we are witnessing is a wholesale reengineering of business processes," Intel chairman Andy Grove recently told analysts. "It will introduce enormous time efficiency, accuracy and depth to commercial transactions."
Intel intends to invest more than $1 billion in its Internet Data Services unit, its ticket into the cyberspace arena. Despite steps to segment its product line, change its development methods (Intel currently runs 10 simultaneous microprocessor projects for servers alone) and wringing out costs from its manufacturing processes, annual revenue growth is slowing.
Enter Gerhard Parker, a senior manufacturing exec in charge of the new Internet-hosting business, which also will deliver Web content and build Web sites for "select organizations." Parker's goal: Capture a major share of the nearly $15 billion that Forester Research predicts will come from managing computer centers for ISPs by 2003.
Industry reaction to Intel's move ranges from astonishment to amusement to disbelief. Can a company whose expertise is in manufacturing PC processors reinvent itself to become a major player in the Internet-services space? Can a company that sells hardware to OEMs figure out how to make money on services, and convince ISPs and resellers to use its data centers?
Web veterans are skeptical. "What's the source of the carrot that would make a company say, 'I'll park my server in an environment managed by Intel?'" asks Tim Wilson, vice president of marketing at Digital Island, which offers its own "Overnet" as an alternative to the public Internet for multinational companies. "Look at HP's recent deal with Qwest. Companies at a higher value than Intel are trying to keep hardware margins or replace hardware margins that are declining. There are big plays in this space virtually every day."
Adds Rodney Loges, a marketing manager at digitalNation, an ISP that's developing hosting software, "We're not concerned with the big boys jumping into the pool. Customers are looking for different things from a hardware vendor than they are from a hosting provider and data center."
Culture club
Certainly no one takes Intel for granted. Nor should it ever be underestimated. This a company that already has enjoyed significant success moving into other new areas such as workgroup networking and e-commerce. To wit, its e-commerce revenue is running over $1 billion a month this year.
Also, Intel's execs remain incredibly focused and continue to work long hours. Daily schedules are so tightly packed that Intel execs literally run from appointment to appointment (as they did during our visits). Employees feel honored to be invited on "death marches" -- grueling trips -- with President and CEO Craig Barrett.
Despite its phenomenal success, Intel's world remains one of austerity and personal sacrifice, and it all starts at the top. Barrett flies coach and routinely runs on less than 6 hours of sleep a day on whirlwind, country-a-day jaunts.
This is also a world where resellers are not only welcome, but also increasingly essential, as Intel gets aggressive in lining up support for its Internet-hosting plan. While Intel can sell services through existing partners such as Excite, it desperately needs to ink relationships with thousands of new partners -- ISPs, Web designers, systems integrators, hosting companies -- if it is going to compete against the likes of IBM in the data-services field.
Marrying Intel's Spartan culture with a massive army of partners is, from Intel's vantage point, a perfect match. Mike Aymar, vice president and general manager of Intel's Internet Data Services, told Sm@rt Reseller that Intel will anticipate where the business will go in two years and will be there, despite a steep learning curve.
Intel "out of the chute" will offer hosting, storage management and business-to-consumer e-commerce, Aymar says, and later will expand into business-to-business e-commerce, improved storage management and managed applications like ERP. And he claims companies will choose Intel because its solutions will be the most cost-effective and easiest to use.
"We do deliver hard products, and we understand infrastructure," Aymar said. "I ran the CAD organization here for five years -- we have internal services businesses, and a lot of the people we put in this organization came out of those. We are not totally coming out of the blue here."
Intel has committed to building a dozen data centers over the next two to three years, ranging in cost from $50 million to $150 million and holding up to 5,000 servers. The smaller centers will be located in areas like Asia, where countries tend to have different telco providers and different laws governing telcos.
New channel
Intel's Maloney returned 15 months ago from a three-year stint in Asia, convinced that the channel is under going the biggest upheaval since it first emerged, in the wake of the 1956 consent decree IBM signed with the U.S. Department of Justice. Trained as an engineer, Maloney was put on Intel's management fast track when he served as Grove's technical assistant from 1992 to 1995. He now heads worldwide sales and marketing.
It was the government's prohibition against IBM's bundling of hardware with services that gave rise to systems integrators and VARs, and now the Internet is spawning new businesses once again. Specifically, Maloney sees VARs colliding with ISPs in the Internet gold rush. In emerging markets like India, he says, it's hard to tell them apart. Meanwhile, systems integrators and Web-development agencies are competing to get businesses onto the Web.
"ISPs are basically wrestling to the ground one medium or small company after another and customizing what they are doing," Maloney said. "The Web-development guys are saying [the systems integrators] don't get it; we've been born in the Net, it's in our blood, we know how this stuff works."
Intel now has a dedicated ISP sales force and has pledged to launch a worldwide partner program for about 14,000 ISPs on July 1 -- though rumors are circulating that Intel will fall far short of that number. ISPs will resell Intel-tuned server-based solutions, says channel manager Robby Swinnen. Over time, Intel may offer matchmaking between ISPs and VARs.
But it's hard to tell how far along Intel really is with this strategy. For example, a spokesman for Verio Inc. -- a national ISP with 4,000 resellers of its own -- says it is not yet talking to Intel but expects it will be once it has "a clearer idea of what Intel is offering."
CosmoAccess Inc., an ISP/reseller based in Lake Elsinore, Calif., says Intel's doings are of little interest. "I think they're searching," said President John Purpura. "All the computer wholesalers we do business with are in trouble because the market is saturated."
Aymar says Intel could end up competing with ISPs that offer hosting capacity in addition to basic Internet access, although he expects a large portion of the new business to go through Intel's channels. Systems integrators could create content and refer them to Intel for hosting; ISPs could do hosting for local businesses with capacity reserved from Intel. And Intel hopes to attract a few marquee names--global 1000 customers that would cause people to say, "Whoa, you're hosting them?" Aymar says.
New deals
Already one of the most active venture capitalists in the industry, Intel is stepping up its activity in time for the opening of its first data center this fall. It is taking equity stakes in or acquiring companies, such as Level One Communications Corp., that provide pieces of infrastructure and services that Intel is missing. This is more ambitious than Intel's earlier strategy, when it was content to invest in order to expand the market for Intel processors.
"It will be reasonable to assume that when we turn on the lights we will have a complete stack," said Bill Miller, Intel's director of content and commerce. "There is colocation which offers power, light and network connection, and you bring your server over and there is managed hosting, where we will provision the servers and keep some level of your application up for you. I expect we will have a mix of customers."
Only last month Intel agreed to invest $200 million in Williams Communications Group Inc. in exchange for an equity stake in the company at Williams' IPO price. Williams is rebuilding a national fiber-optic network after selling off its first one and will provide more than half of the backbone for network transport between Intel's data centers.
Williams Vice President Kevin Johnson says the companies struck a deal because Williams' ATM-based backbone can handle Intel's multimedia content and because Williams is a wholesaler that won't compete against its partners.
Frontier GlobalCenter, an Internet-hosting company, also is talking to Intel about handling a portion of its connectivity business and other potential partnerships.
"You need good connectivity, so you have to develop the backbone to the interconnection centers and also the connection centers to the major ISPs," said GlobalCenter President Don Detampel. "For every dollar we get paid in real estate for racks or cages, we get three dollars on the connectivity side. The more lucrative side is moving content and information across the network, so it's logical Intel would need to align with a network player."
Intel's iCat division, whose Commerce Store and Commerce Cart are aimed at small and midsize businesses setting up Web storefronts, also is likely to figure prominently in Intel's data centers. Intel acquired iCat in February.
"The high level of entrepreneurship inside Intel surprised me," said sales director Dan Merrill, who designed iCat's reseller programs and says iCat is "one of the stovepipes" in Intel's data-services plans.
Reality check
Despite its deep pockets and past successes, Intel has a lot to learn about the dynamics of the Internet services business, and many of the companies it may have to depend on aren't necessarily willing to march to Intel's tune.
Chili!Soft, a Bellevue, Wash., startup that offers Microsoft Active Server Pages on several platforms, claims it is being punished by Intel because it already offers its software on Sun Microsystems' SPARC. Aymar acknowledges that Intel's data centers will include Sun servers for areas such as "very high-end database management" because of customer demand.
"Intel looks at Chili!Soft as a company that has chosen not to develop exclusively for the Intel platform," said CEO Charles Crystle. "Intel would rather see Active Server Pages running on NT so they're not losing Intel processor sales. But the bottom line is, people choose their operating system first," before the processor -- which means customers often select Solaris on SPARC instead of NT on Intel (though a Solaris/Intel push could come soon).
Other potential partners say Intel may need them more than they need the chip giant. "Intel will partner with us because they'll have to," said Bobby Patrick, vice president of marketing for Digex Inc., a subsidiary of Intermedia Communications that hosts Pandesic, the joint venture that Intel and SAP founded two years ago.
"Intel will build great data centers," Patrick says. "But it comes down to the skills of hundreds of people certified around Microsoft and Sun technology, and that's not easy to acquire. We've watched many people similar to Intel try to get into this business, and they've come in and gone out."
There also are challenges outside of the enterprise, where Intel has much to learn about dealing in the small and midsize business market and consumer arena, as the chip giant moves into the Internet services business.
Just ask Intel's resellers. Relational Inc. was one of the first partners in Intel's InBusiness Remote Services Center, which Intel launched in February to figure out how to sell remote management services to small businesses. The Center is now a part of Aymar's Internet Data Services group. But Relational reports that Intel still has some work to do on features, pricing and branding.
When targeting smaller companies, Intel's management software often loses out to Symantec Corp.'s despite being less expensive, says Relational President David Weisong. The reason: Small businesses are more comfortable paying a flat fee than buying the subscription required by Intel.
Clearly, Intel has a lot to learn about the software business. And the same can be said for its Internet business. Under manufacturing veteran Parker, Intel's Internet hosting unit plans to use the same "copy exactly" approach for building data centers as it employs in chip manufacturing.
But, as some skeptics have pointed out, operating in a highly dynamic Web environment is another world entirely. What has worked so well for Intel in the past may not be a formula for success in cyberspace.
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