Analysts: Intel May Not Fully Drive Sun's Server Sales

In a show of solidarity, the two companies agreed to a nonexclusive deal on Monday to primarily help promote Intel Xeon chips in Sun x86 volume servers. The decision, according to Sun CEO Jonathan Schwartz, was based on a need to augment its high-end Sparc processor-based servers and its low- and mid-range rack servers -- populated by Opteron processors made by Advanced Micro Devices.

There's no denying that Sun's business has picked up in the last year, but not from an earnings standpoint. The company, which reports its earnings after the markets close on Tuesday, has had several quarters of sales growth. But analysts are still skeptical.

Sun is "barely squeaking by," says Charles King, principal analyst of Pund-IT Research. "They need to not only serve the needs of their base but they need to put together some compelling new products because they need to expand beyond it. The x86 platform is still, from a growth standpoint, the most explosive part of the server market. On a per-unit shipment basis, Sun clearly wants to make a splash there and the best thing is to go with Opteron and add in Xeon. Now they've done that."

Compared with its rivals in the server space, Sun has a lot of ground to make up. The company lags behind Hewlett-Packard, Dell, and IBM in unit sales, according to IDC's November 2006 Worldwide Quarterly Server Tracker. Linux servers based on x86 hardware also outpace Sun's Solaris operating system 87.5 units to 1. In addition, Sun's Solaris only makes up 25% of worldwide unit market share on x86 servers, IDC said.

Dan Olds, a principal analyst with the Gabriel Consulting Group, says he'd be interested in seeing Intel push Sun to come out with four-socket Intel-based systems as a replacement for large mainframe computers, sometimes called Big Iron.

"IBM is the most successful with it, but it's something that Dell and HP have pretty much decided they weren't going to do," says Olds. "Intel is looking to Sun to build larger than four-socket Intel servers. That means Intel gets greater access into that big-system market that they've been wanting for so long. This will give them a competitive reach into bigger companies and a deeper reach into the data center. Right now, the data center is ruled by mainframes and big Unix systems. Intel would love a chunk of that. It's not a massive market in terms of numbers of boxes, but it's a nice market in terms of margins and the cost of those boxes. That's a good place to be, especially if you have the small, cheap servers already locked up."

Steve Kleynhans, a research VP with Gartner, says Sun has been doing well with its AMD partnership but there simply are large customers out there who want to work with Intel processors.

"Sun probably finds the marketing dollars from Intel very attractive as well," says Kleynhans. "Intel can be a pretty good partner to have. It's a vote of confidence and it shows how far Intel has come with its latest processors. A year ago, it was certainly behind AMD when it came to the raw technology in server processors. This is a big vote of confidence from Sun to show that they've closed the gap, if not surpassed AMD."

Analysts didn't give an estimate of when they thought Sun's hardware business might nudge the company back into the Top 3, courtesy of new Intel chips.

InformationWeek senior editor Sharon Gaudin contributed to this report.