Drip Port's Visit to Intel

On Tuesday morning, Brian Graney and I ventured beyond the Washington, D.C. beltway for the first time in weeks in order to visit the spankin' new Internet Data Center that Intel (Nasdaq: INTC) and its Intel Online Services, Inc. division opened that day in Chantilly, Virginia. During the one-hour drive to Intel, Brian raged against the IRS and everything related to taxes, while I peacefully remembered a childhood spent riding a bike and squishing caterpillars.

Thanks to good directions, we found Intel's new $150 million facility out in the middle of brown fields and directly beside a large sod farm. The building is unmarked for security reasons -- Intel's name is not on it anywhere -- but it does stand out as something technology- or information-related. What else could it be, given that there are not any delivery trucks outside a building this large?

We entered the building through double glass doors and were met by kind Intel greeters. They had name tags ready for us: "Brian Graney, Jeff Fischer, The Motley Fool. ESCORT REQUIRED."

Now, Brian typically needs an escort wherever he goes, so he was happy with the requirement. Of course, the need for an escort is another aspect of the data center's high level of security. We took our tags as we entered the lobby and we looked about. The lobby was understated, but well decorated, and adorning the wall directly opposite the entrance was a large television screen, mesh with the wall. The TV was on, so naturally as we entered the lobby we both looked at it for several seconds to see what was playing.

We were later told that the television is strategically placed and always left turned on because then everyone who enters the building looks at the screen, and while they are doing so, Intel is recording a close-up video of their face with a camera placed behind the screen. Yes, security is this tight. There is also an electronic key-entry system, followed by a handprint reading system, and then revolving doors so that nobody can "tag along" and follow you inside.

Despite all of this, one of the first things Brian said upon sitting down inside was "I'm taking this chair home with me." The chairs in the room may have been the most comfortable that I've ever had the joy of using. The chair, in fact, instantly fixed 10 years of a bad back. However, you don't want to hear about Intel's chairs. (We'll save that gem for another time.)

Across from our conference room, behind a tall, rounded glass wall, stood the data operation or control center, which looked like a small version of a NASA control room. The far wall in the control room is covered with screens, the middle one being a world map that tracks how data is flowing over networks around the world, from "good, better, to optimal" (Intel never wants to be below "good").

In the room, employees work four days per week, 10- to 12-hour shifts (because fewer employee shifts per day result in fewer computing errors upon shift changes). The employees monitor flat-panel computer screens and fix problems from chairs that are even more comfortable than the ones in the conference room. Meanwhile, on the far wall, more giant television screens display news from around the world to keep employees up to the minute should anything happen that may impact their data networks. (We happened to see the Fool's own Bill Barker on the monster TV screens doing a live interview on MSNBC regarding Microsoft's lawsuit news.)

Speaking to a small group of journalists and two Fools was Mike Aymar, president of Intel Online Services, Inc. On this day, his division opened its second location for operations, and here we were. This 73,000-square-foot fortress will house up to 10,000 servers and employ 250 people when fully staffed. Intel's first data center opened last September in Santa Clara, California. The 10th center should open by the end of this year, with new centers expected to open in the United Kingdom, Japan, and Korea before July. Overall, Intel will invest about $1 billion in new data centers before 2002.

Why?

Intel's old mission was to "Be the building block supplier to the PC industry." Its new mission is to "Be the preeminent building block supplier to the worldwide Internet Economy." For a quick review, Intel is divided into four divisions: Client Platform (which is computer chips and related devices), Network Infrastructure (Intel's growing networking hardware division), Server Platform (high-end server microprocessors and related products), and, now, Solutions and Services, which are Intel's data centers, run by its Intel Online Services division.

This mission of Intel's Online Services is as follows: "For businesses that depend on mission-critical Internet applications, Intel Online Services provides world-class application hosting with highly reliable, innovative, and responsive services tailored to meet [the client's] needs."

Intel argues that companies needing technology used to employ one-stop shopping (where a company went to one company, such as IBM, for everything related to e-business). Now, specialization is growing much more quickly. This is where a company puts together the best pieces of equipment and services from various industry leaders thanks to open standards and increasing interoperability. Now, e-business is a pyramid of related needs that must be filled, and it goes like this, from the top down: Solution services, application services, operation services, and network services.

Network services provide bandwidth and network routing connections to the Internet, such as UUNet and Williams Communications. Operations services, which is where Intel Online Services wants to be a leader, provide the environment for data to be processed and managed. Application services provide the management of applications related to the data. (Intel's partner on this end is Pandesic.) Finally, at the top, solution services provide the development of e-business solutions, something the likes of which Proxicom, iXL, and Agency.com do, which are all Intel partners.

That's all well and good. However, Intel foresees a large "value gap" in this four-tier pyramid, between operation services and application services. Intel calls this value gap in the pyramid "e-Business Services Platform," and this is a business opportunity, along with operation services, which Intel wants to lead by providing comprehensive data management, hosting, and e-business services solutions. Essentially, Intel will be the computer power and data source, as well as data manager, router, and servicer behind a company's e-commerce business and its related database and network needs. (Intel says that 80% of e-commerce sites now online are business-to-business sites, something Intel will target.)

Overall, Intel aims to be one of the top revenue generators in the online data management, hosting, and services businesses. The company believes that currently no single company has more than 9% market share, so the industry is scattered and wide open. This indicates that (at least so far) being the "first mover" in this industry was not critical -- especially not in the way that so many critics bemoaned one year ago when Intel announced this initiative. Being "first to critical mass" will prove much more critical, and Intel already has the bucks and the expertise needed to build large data centers around the world quickly, and the brand to land large clients.

Despite our repeated threat to steal their chairs if they didn't give us detailed financials, Intel would not comment on its internally projected operating margin for the new Online Services division. However, President Mike Aymar did say that operating margins will be considerably lower than Intel's microprocessor business, but they will be attractive enough to create a strong return -- otherwise Intel would not pursue this opportunity. Mr. Aymar also estimated that Intel's larger data centers will become profitable when they are running at about 70% capacity, which will likely require a number of months after each one opens.

Brian may have more to share next week about our interesting, enjoyable visit to Intel and its friendly employees. Brian will also write about Intel's first-quarter earnings next week, which the company reports next Thursday evening. Brian will be writing about the results in earnest on next Friday.

Be Foolish and have a great weekend!

-- Jeff Fischer, TMF Jeff on the boards.

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