Intel CEO confronts OEM grumbling around direct chip sales
The Google Conundrum
CEOs of the major server and PC makers have proved reluctant to complain in public about Intel's very substantial "distribution" business where it moves processors and white boxes directly to customers. But pull one of these executives away from the microphones, and you may well hear a minor tirade on the topic.
The Register has received impassioned complaints from very high ranking executives at some of Intel's top customers about the distribution business. Google, a massive direct consumer of Intel's chips, comes up as a particular sore spot but so do the sales of chips and white boxes that go to other large service providers. Reactions to Intel's actions here range from "annoyed" to more serious gripes about OEMs feeling that Intel is undercutting their business and functioning as their "number one" competitor.
During an interview today, Intel CEO Paul Otellini discussed some of these issues with us, arguing that the direct business sticks to the company's traditions and is, well, business.
"Intel's first order was from a company called Avnet - a distributor," Otellini said. "It was Hamilton, which has evolved into Avnet now. Distribution has been part of our business for forty years. Distribution still is over 25 per cent of our overall business even today on a worldwide basis.
"Why in the world would we not want to sell product to people who want it?".
According to Otellini, Intel's commitment to establishing a "level playing field" aids its overall business. The company caters to the needs of smaller players, hoping they will develop products that drive future demand on a more significant scale.
Deliver us from temptation
"To some extent, that comes with the responsibility - with the job we have - which is to make sure there is a vibrant set of customers for our products," he said.
"We have never succumbed to the temptation or requests of our largest customers to favor them over our smallest customers."
Of late, however, the rise of mega service providers willing to do much of their own hardware building grunt work has created a new set of issues. Google stands as perhaps the biggest example here, since it's comfortable crafting tens and even hundreds of thousands of homemade servers. It's often said that Google ranks as perhaps the fifth or sixth largest consumer of server processors and hard disks, leaving it behind only the world's top server vendors.
Most companies would consider constructing their own hardware a terrible waste of time and effort. Google, however, can create low-power, cheaper boxes that cater to its rather unique needs. In addition, the company's immense clusters can tolerate large numbers of failures, reducing per-server concerns. The ad broker has even decided to make its own switches.
Enough other service providers find this low-power, low-cost model attractive to the point that Dell has rolled out a new business where it will build bespoke motherboards if the orders reach the right volume.
Its the economy...
This is a very obvious sign of the global economy sliding into heavy contraction due to the American credit crisis and subprime mortgage debacle.
Big monsters like Dell, HP and IBM need constant feeding of revenue. Now that the big enterprise business they are accustomed to surviving on is contracting they are looking for other pastures to feed on.
They are whining about Intel's direct business. They are dropping prices to take smaller tier two opportunities from the smaller OEMs like Rackable, Verari, Western Scientific, Aspen, etc.
The big monsters have a huge appetite and they need to eat. MUST HAVE FOOD OR MONGO GET ANGRY! GO ON RAMPAGE! ARRRRRRGH!
new flash: google not unique
Here's a news flash. Google is *so* big...(how big is it?) It's so big that it is cheaper for google to design its own systems and have them custom-built to google's specifications. Just like HP does. Why shouldn't it be? Google builds more servers than a lot of vendors.
If some other vendor was actually any better at design, and was any better at cost management, it could undercut google's cost, and then I betcha google would be happy to buy from them.
They have no right to whinge
They're whinging because they're missing out on big orders to a company higher up the chain? Well thats how supply/distribution works!
If i wanted...say... a pallet of paper, i don't buy 320 individual reams from Staples do i? (based on pallet packed in 5 ream boxes in 4x4x4 configuration), i go to a wholesaler who will sell it at less than the 320 invidual ream prices.
Likewise google arn't gonna pop down to PC World and buy 2,000 CPUs
A distributors job is to place one large order to a company, then sell on lots of smaller orders to multiple customers, there are often several distributors in the chain.