ALEXANDRIA, VA (Sept. 28, 1999) -- "Cool!"
That was young Brian Graney's (TMF Panic) reaction when he saw his first episode of Miami Vice.
That was my reaction when I first read about Intel's (Nasdaq: INTC) plan to create giant server farms around the world.
Intel announced a plan to build and run high-tech server farms in April of this year. The company wants to run the data centers in order to offer small- and medium-sized companies quick and scalable e-commerce solutions alongside reliable hosting services. Intel isn't doing this "on the side." It is doing this full-force. Intel's corporate mission has even changed to include "be a building block supplier of the Internet economy."
Despite our initial reaction ("cool!") to the news (see our April column), the company's server farm announcement was largely met with widespread criticism and doubt that sounded like the following: "This is so different from what Intel does. Gee. It sounds risky. This is a service business. Intel lacks experience offering services." (As if Intel hadn't offered any service to its dozens of OEM partners the past 18 years.) The most blatantly Wise aspect to the criticism from journalists, however, was that the criticism arrived on the same day as Intel's announcement.
Now think about this. Intel is a respected company. Right? Agreed? Yeah -- it's up there. It's one of the most valuable operations in the world. Intel has top brass that makes the Marines look dull. Intel's management discussed and analyzed the server farm business for several months, if not years, and it discussed and analyzed the business with worldwide expert consultants as well. Management studied the business from all angles for several months. It devised a business plan. It worked it through, front to back, and back to front. Then, and only then, it finally announced its plan.
Within a few hours, the negatively slanted articles rolled from journalists' fingertips nationwide. Now, I don't know about you, but I really doubt that I could research a young industry quickly enough to legitimately criticize a company's plan to enter it just a few hours after the company's announcement. However, I apparently lack skill. Several Wiser journalists had an opinion within hours. The opinions slanted toward: "Intel is reaching. Intel is desperate. Intel is going outside its core business in an eager search for growth. Intel sees the PC market in decline."
In reality, Intel always seeks growth. It has the means to grow. It has researched several industries, invested in hundreds, and it is investing heartily in those that it believes are most attractive. Also, if Intel believed that the PC market was fundamentally in decline -- as so many journalists concluded within a matter of hours (and I'm not talking about CPU prices, which have obviously fallen mainly at Intel's hand) -- then Intel probably wouldn't invest in server farms. A server farm business is predicated upon a need to host massive amounts of computer traffic. As for the argument that server farms are well outside Intel's core skill set -- that is silly.
The new business is much more complementary to Intel than most journalists could admit. The servers in the server farms will run on high-end Intel processors. Alongside its hosting business, Intel is offering e-business solutions with a focus on e-commerce. The e-business solutions offered by Intel will be optimized on Intel-run servers. Therefore, both new businesses offered by Intel work to build an even deeper moat around Intel's dominance of the microprocessor market. Plus, the server farm business complements Intel's move into computer networking. As companies arrive online, networking equipment is as necessary as the hosting service.
Critics also complained that the server market already has leaders. Sure. All markets by definition do. None of the current leaders are nearly as large or deep-pocketed as Intel, however, and arguably no competitor will be as reliable (Intel's middle name is "ol' reliable Nell"). The final kicker: almost certainly no competitor will have the scope or depth of Intel's offerings, and no competitor has the experience that Intel does in running a large, giant ship the likes of a server farm (the yield that Intel generates at its giant chip fabrication plants are unheard of elsewhere).
With the turn of a key, Intel Online Services -- as its new business is called -- delivers second-generation Internet application hosting services that provide better hosting reliability and faster development of e-business solutions. In addition to providing and managing the facilities and network, Intel purchases, integrates, and deploys all of the hardware and software necessary to run applications.
From Intel's press release:
"We believe Intel Online Services' second-generation approach fills an important need in a surge economy which is characterized by the dynamic unpredictability of Internet demand," said Mike Aymar, Intel vice president and general manager, Intel Online Services. "The benefit of Intel Online Services is the rapid time-to-market it provides solutions developers, as well as optimal hosting reliability for customers."
Intel is investing over $1 billion to set up airplane hangar-sized server farms around the world. The next facility will open in Northern Virginia. We realize that this won't be Disneyland -- you can't buy a ticket and get a ride through "the server farm" -- but perhaps Brian and I will work to arrange a tour. It would be worthwhile. From Reuters: "The command center of the [Intel] data center looks like a command center at NASA, with rows and rows of terminals facing 10 big screens, where operators can monitor the status of all the running servers, as well as keep an eye on world news. The facilities have intense 24-hour security and barbed-wire fencing surrounding back-up power generators."
So, if we can't arrange for a legitimate tour, we'll simply dress Brian in black and send him in one night.
Intel's server farm business addresses a market that is expected to grow from $1.5 billion in sales this year to $12 billion by the year 2003, according to IDC Corp. We'll be right here watching... and, at times, we'll have to point back to our April column (which may do a better job than today's column at talking about this venture) and recall how so many people criticized the idea offhand the same day that it was announced. That's not Foolish. Remain optimistic, Fools, and think hard before jumping to a critical conclusion. The role of the skeptic is very easy to play. That's why the Wise play it.
P.S. The next two days we'll have a Foolish guest from the message board discussing aerospace and defense. Who is it? Check in and see. Then, next week we'll start our food study of H. J. Heinz (NYSE: HNZ). Finally, yesterday we sent $100 to buy more Johnson & Johnson (NYSE: JNJ).
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