February 26, 2001 5:25 PM PST

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Intel will curtail spending in its online services division because of lower-than-expected revenue, CEO Craig Barrett said Monday.

Intel Online Services, which competes in the Web-hosting and -management market against Exodus and others, was announced with great fanfare in April 1999. Although the division continues to gain customers, Barrett said, "revenue per customer was less than anticipated." As a result, the company will cut back on installing servers and other equipment in its data centers.

In a conference call, Barrett also termed the current economic condition a "recession" that could continue its deepening effect in the second half of the year.

"We're still optimistic that the second half of the year will show the most strength, but the downside is no one knows how deep the recession will go," he said.

Federal Reserve Chairman Alan Greenspan has yet to call the current climate a recession. But, Barrett said, "I think it's pretty clear that the manufacturing world is in pretty bad shape right now."

Barrett's comments come on the eve of the Intel Developer Conference, a twice-yearly event dedicated to all things Intel. This year, the three-day event promises to be a mix of positive announcements and cautious statements about the future.

On the optimistic side, the Santa Clara, Calif.-based chipmaker is expected to announce that it has "taped out," or completed, the design phase for "McKinley," a code name for a server chip coming in 2002. The company is also expected to provide an update to the road map for the Pentium 4 and the XScale, an energy-efficient processor for handheld computers and cell phones.

On the downside, Intel can expect to face a number of questions about the limping economy, slow PC demand, and the company's progress in spreading into communications, networking and other fields.

Although some of the company's plans to diversify have borne fruit, others have not. Services in particular haven't proved to be a boon. Earlier this year, the company terminated an e-commerce hosting service for small and medium-sized businesses.

Last week, Intel put the lights out on Intel Media Services, a dedicated network for streaming media. Intel Media Services rented airtime and other services to companies that wanted to broadcast stockholder meetings, training courses or other events over the Web.

Intel Online Services was inspired, in part, by Intel's ability to manage factories all over the world. The new centers were to become "bit factories" that would process data and conduct Internet transactions on behalf of large corporations and even telecommunications providers.

Data centers housing thousands of servers were erected in Santa Clara, Europe and Asia. Each center costs roughly $50 million to $100 million or more.

Barrett said the need for these types of hosting services exists. "We still firmly believe in managed services."

Nonetheless, Intel's business hasn't taken off as planned, requiring cutbacks. The company will not cut back on new data centers as much as on installing new hardware inside existing centers.

"Revenue per customer drives the number of servers per customer," he said, "We will (limit) the buildout of the hardware."

Barrett also quashed a report from Salomon Smith Barney analyst John Joseph, who on Monday cited high-level Intel sources allegedly saying the company will cut capital expenditures for chipmaking.

"I guess he didn't go high enough," Barrett said.

 

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