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"This is a much more efficient business model for us, one that does not require Digital to continue to make substantial and continued investments in semiconductor process development and manufacturing facilities," Palmer said during a news teleconference today.
Observers agreed with Palmer's assessment.
"Apparently Digital has elected to go the fabless semiconductor route, which seems to work quite well for [Sun Microsystems Inc. Chairman] Scott McNealy," said Terry Shannon, editor of Shannon Knows DEC, an Ashland, MA-based newsletter.
"This just simplifies their strategy...and gives them the money to rejuvenate," Jim Garden, director of technical services at Technology Business Research in Hampton, NH, said of Digital.
Digital and Intel today released some of the details of their agreement, which in addition to the handing over to Intel of Digital's Hudson, MA-based fab as well as development operations in Jerusalem, Israel and Austin, Texas, include the following, according to statements from the companies:
Intel Chief Operating Officer Craig Barrett, who was also at the conference, singled out three benefits to Intel from the deal with Digital.
"With an addition of a state of the art fab, a new revenue stream and the endorsement of future systems based on Intel's IA 64 family of processors, I think we've reached a very beneficial agreement for Intel," Barrett said.
Barrett also cited as beneficial the end of the litigation between the two companies. Digital sued Intel in May for infringing on 10 Alpha-related patents to build Intel's Pentium line of chips. Several weeks later Intel fired back with a suit of its own against Digital over alleged misuse of technical information Digital had obtained through a nondisclosure agreement with Intel.
The cross-licensing agreement which Digital and Intel have signed "eliminates the need for distracting litigation," Barrett said.
One observer said that calling a legal cease-fire alone was probably worth a great deal of money to Intel, and may well indicate that Digital had evidence that Intel had indeed infringed on its patents.
"I always felt that there was a certain validity to Digital's suit, [but either way there is no] benefit to Intel to continue a lawsuit on for years and years," possibly even delaying the release of Merced, said Chris Christiansen, an analyst with International Data Group in Framingham, Massachusetts.
However, Garden of Technology Business Research saw the potential crown jewel of the agreement as being Intel's acquisition of Digital's StrongARM processor technology. As the microprocessor market saturates, Intel can use StrongARM, with its low electrical power requirements, to leap into the nascent market for intelligent pagers, game stations and hand-held computers, Garden said.
"We see [StrongARM] as the sleeper in this whole agreement [which] enables Intel to jump into this whole new embedded marketplace," Garden said. "This is the sweetheart thing that is going to save Intel's butt because the marketplace is falling apart on them."
Though Digital will hand over StrongARM as well as the manufacturing of Alpha, the company has by no means abandoned Alpha, Digital's Palmer said.
"Digital remains fully committed to its dual platform strategy on both Alpha and Intel platforms," Palmer said. Jettisoning the manufacture of Alpha will actually "allow us to focus on innovations in Alpha design and systems architecture," he said.
Asked why a Digital customer would continue to buy Alpha once Merced ships, Palmer said that a niche would still remain for Alpha.
"The Alpha architecture is a very clean architecture, and we believe we'll be able to maintain a performance leadership in some applications," Palmer said.
But IDC's Christiansen said that Merced and Alpha were not so distinct, adding that he expects Alpha will fade away sometime after 2001.
"Why would a company want to sell a competing processor to Merced?," Christiansen said. "I think [the agreement] considerably shortens the lifespan of Alpha."
Shannon of Shannon Knows DEC disagreed.
"Merced is clearly going to soak up a broad portion of the market but there will still be a place for Alpha," most notably in the personal and technical workstation market, Shannon said.
Regardless of their vision of how the companies' agreement would finally shake out, analysts agreed that the deal was a good one for both companies. Digital can refocus its energies, and Intel has picked up a cartful of items at a bargain-basement price, they said.
"The bottom line is Intel got a whole hell of a lot more than $700 million worth of stuff out of this agreement," Christiansen said.
SGI said it will cut 700 to 1,000 jobs from its worldwide workforce as part of an effort to lower operating expenses. And confirming rumors circulating since last week, McCracken, a 13-year veteran of SGI, said he will leave the company as soon as a successor can be found. Gary Lauer, executive vice president of worldwide field operations, also said he will leave SGI.
"The resignations are really sacrificial lambs," said Peter ffoulkes, an analyst with San Jose, CA-based Dataquest Inc. "They're doing the decent thing to show Wall Street SGI is not going to be half-hearted about what it needs to do."
SGI is struggling to adapt to a changing market in which Wintel systems -- those that run on Microsoft Corp.'s Windows operating system and Intel Corp.'s processors -- are eating into its Unix workstation niche from the low end up, analysts said.
"They have a problem because the Wintel architecture is getting stronger and it's getting better, and SGI is being pushed into a very high-end niche that gets smaller and smaller over time. There are some very powerful graphics platforms running on Wintel today," said Dave Jones, a financial analyst at California Technology Stock Letter in Half Moon Bay.
To get back on a growth spree akin to the one it enjoyed in 1995, when SGI led the market with its high-end workstations, SGI should hurry production of its own Intel-based machines and meet the Wintel challenge head on, ffoulkes said.
In addition, analysts said the company needs to recognize that the market for high-end Unix workstations is moving away from the technical and scientific communities and towards the commercial enterprise space.
SGI has recognized these changes and in board meetings this week forged a plan to adjust its business model accordingly, said spokesman John Thompson.
SGI already has announced it will build Intel-based workstations that run the Microsoft operating system, and those machines are expected to begin shipping after June next year, Thompson said.
"The Unix market is growing a little, while the engineering and technical workstation growth areas are in NT," Thompson said. "We understand there is a need to be in both Unix and NT and we'll be bringing more focus to that area."
SGI also will focus its sales and marketing efforts more on the commercial arena, targeting large enterprises that move large amounts of data across servers, Thompson said.
Daniel Kunstler, principal analyst at J. P. Morgan Securities, agreed that "there is life after workstations" for SGI, if the company broadens its server business to focus on the enterprise, rather than just the scientific, technology and entertainment industries.
"Their server side has the technology to save them, but they need to add a distribution channel to their offerings and strike some partnerships with the ISV community that caters to the commercial marketplace," said Jerry Sheridan, director and principal analyst at Dataquest. "And they need some sales people conversant in the commercial space."
Ffoulkes agreed that SGI has the server technology to carry it in the commercial arena, "but it's a challenge because it takes a long time to gain the confidence of the corporate MIS dept."
SGI made an error three years ago when it neglected to follow the example of fellow Unix vendor Sun Microsystems Inc. and move into the Internet market, according to a statement released by Zona Research Inc.
While Sun was building on its mantra of "the network is the computer," SGI put its faith in "the glitz and glamour of VRML and high-end graphics ... and missed the fact there was a real opportunity in the...network itself," Zona said.
But SGI "is not going to become an online transaction-processing house anytime soon," SGI's Thompson said.
"SGI has had problems with its business plan, but over the past six months it has been seeing those problems and trying to put them right," ffoulkes said. "The question is, do they have enough time and stamina to do it?"
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