Original URL: http://www.theregister.co.uk/2008/04/09/otellini_intel_oem_chip_sales/

Intel CEO confronts OEM grumbling around direct chip sales

The Google Conundrum

By Ashlee Vance

Posted in Servers, 9th April 2008 21:37 GMT

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.

Along similar but perhaps more controversial lines, Intel designs some motherboards for Google, adhering to those same low-power chip, lower-end memory and lower-end disk boundaries. (Otellini also serves on Google's board, which could prompt suggestions that the search company receives unique treatment.)

"Google has been an Intel customer since day one," Otellini said. "They bought through distribution. They bought from a local board manufacturer in Mountain View. And now they buy them directly from us because they are a large enough customer.

"Why in the world should we not sell to them?".

On one hand, Otellini makes, we think, the right point. Google and other independent-minded large service providers have shown no interest in having a server vendor hold their hands. They posses the technical know-how and resolve to tackle data centers on their own, and bringing in a company such as HP, Dell or IBM just ads a layer of unwanted baggage - and cost. A company such as Intel provides the most direct route to satisfaction and a productive business.

Just doing our job

Still, the strategy seems rather risky for Intel during more competitive times. HP, IBM and eventually even Dell all brought AMD inside when Opteron stood as the dominant x86 server processor on the market. Should AMD get its act together again, these server vendors may remember losing out to Intel on a couple of direct deals and decide to angle more of their purchases and designs toward Opteron.

"HP or Dell act in their own self-interest," Otellini said. "They also are going to buy the best products they can at the lowest prices they can. Our job is to try and meet those needs, just like our competition's job is to try and meet those needs."

There's some room for argument over whether a company such as Google or another service provider counts as a potential customer or a competitor to a server vendor. Otellini, however, contended that the cases we presented would have the direct purchasers stand as competitors. In such cases, it's not Intel's job to figure out when a "competitor" of a server vendor deserves chips. It's only Intel's job to the sell chips, Otellini said.

"If a company decides to be in a certain business, is it another company's job to judge that?" he said. "Yes or no? I don't think so."

You have to wonder if questions around Intel's direct business will grow in the coming years should the mega data center and cloud computing build out continue as some pundits predict. Companies such as Google, Amazon.com and Microsoft have started stepping on the toes of HP, IBM, Sun and Dell by offering access to processing power, storage and software online. Should these companies fell that the all-out model used by Google makes the most economic sense, they may turn straight to Intel and AMD rather than server suppliers.

While you can understand the server and PC maker's gripes around Intel's direct model, the vendors seem to gloss over the fact that Intel's removal from the direct market would only result in AMD trying to snatch up the available business. And so the difficult game of placating customers/competitors will continue for Otellini. We'll be sure to send him a balancing bar to help navigate the tightrope and perhaps some get well soon cards for the server crowd. ®