November 14, 2000 2:10 PM PST

Intel scraps server appliance brand

Intel unexpectedly has abandoned its brand of NetStructure server appliances.

The chip giant launched NetStructure in February but quickly ran afoul of original equipment manufacturer (OEM) customers such as Compaq Computer and Dell Computer, which use Intel processors in competing products.

"When we identified this opportunity, most of our big OEM customers were not focused on that market segment," Intel spokesman Tom Beerman said Tuesday. "Since that time, our traditional OEM customers and others...have shown more interest in that space."

Intel will continue to manufacturer the servers--abandoning only the brand--and sell them through OEMs Dell, Compaq and Hewlett-Packard, "in other words, their traditional distribution channel," said Technology Business Research analyst Humberto Andrade.

Santa Clara, Calif.-based Intel stepped back from marketing a separate product, responding to complaints from its largest chip customers, Andrade said. Intel's problems with PC makers mounted as more offered their own products and as the server appliance market grew more lucrative. Companies specializing in the devices, such as Cobalt Networks and Network Appliance, have racked up annual growth rates of 50 percent or more.

Server appliances--small, limited-function servers geared for specialized tasks such as email or storing data--are one of the hottest hardware growth areas, analysts say.

Market researcher IDC forecasts the server appliance market will exceed $11 billion by 2004, up from $1 billion in 1999. Gartner is more bullish, forecasting $14 billion by 2004.

"We didn't think it was a good way for Intel to go, to go out there and sell to the end customers," Andrade said. "This created sales conflicts. Suddenly, they realized they were competing against their own customers."

To avoid ongoing conflicts, Intel apparently shifted its strategy.

"We think we can be much more effective going back to our bread and butter of working with our OEM customers to get our technology in the hands of end users," Beerman said. Intel will continue to offer the server appliance technology, "but we will no longer sell the branded products directly to end customers."

The company probably most affected by Intel's server appliance sales is Dell, whose product line is more tightly wedded to the Intel designs than are Compaq's, HP's or IBM's. Dell chief executive Michael Dell would lose no tears over Intel backing off selling Intel-branded servers, he said at a news conference Monday during the Comdex trade show in Las Vegas.

If Intel increased the number of products that compete with Dell's own, "it would certainly cause us to look for alternatives" to Intel when buying CPUs, Dell said. "It's a topic of discussion from time to time."

But he said Intel's current product line overlaps Dell's only in "fringe" areas. "It seems to me they are moving away from that," Dell added.

Dell is the only major PC manufacturer still selling strictly Intel-based systems. Compaq, Gateway, HP, IBM and Micron Electronics now all offer PCs with AMD processors, and Compaq, HP and IBM sell servers with their own processors as well as those from Intel.

A commitment made last month with Microsoft to develop future appliance server and related storage products more tightly tied Dell to Intel processors and increased potential conflict with Intel.

Dell in April moved aggressively into the server appliance market with the PowerApp server, but the Round Rock, Texas-based company is not the only major PC maker interested in the market segment.

For example, Toshiba on Monday at Comdex said it would begin marketing a server appliance next year. Compaq also is firming up its position in the market segment with its TaskSmart server appliances.

News.com's Stephen Shankland contributed to this report.

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