When it comes to microprocessor speeds, Father Time really does accomplish some amazing things. Back in 1996, I had a PC running a 133 MHz. Intel (NASDAQ:INTC) Pentium processor. At the time, that was one of Intel's most powerful chips. Today, however, Apple's (NASDAQ:AAPL) iPhone 3GS uses a 600 MHz Samsung chip. And HTC's recently announced HD2 phone uses a 1 GHz Qualcomm Snapdragon processor, which combines notebook-level performance with the power consumption of a smartphone chip.

Notebook-level performance from a processor capable of going into cell phones? Well, that's a start. How about putting some of those cell-phone chips into servers?

Going small, cheap, and green
For those of you still prone to thinking of servers as towering machines made with enough steel to build a Hummer, the idea of having them run on chips that can go into a device that fits in your pocket seems pretty far-fetched. Yet that's basically what a start-up called SeaMicro just accomplished. The company has put together a server that uses 80 Intel Atom processors -- the same chips that power low-cost netbooks, and which Intel aims to get into smartphones. And while SeaMicro's approach to server-building is pretty unique, it's just the most extreme example of a broader trend that's been turning the server industry on its head: installing a large number of cheaper, less power-hungry systems to do jobs that were previously handled by a smaller number of "big iron" machines.

To be fair, there's still plenty of demand out there for big-iron systems. IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ), and Sun Microsystems are still selling their share of high-end systems. When it comes to running mission-critical business applications from the likes of SAP AG and Oracle (NASDAQ:ORCL), many companies are still more comfortable with the costlier gear. But a lot of factors have been working in the favor of cheaper systems that offer more of a pay-as-you-go approach to building out a server farm. These include:

  • Big improvements in the management software needed to run a data center with hundreds, if not thousands, of small servers.
  • The spread of virtualization technology from VMWare (NYSE:VMW) and others, which makes it easy to move an application from one server to another without any hiccups.
  • The availability of blade servers and other architectures that make it possible for a bunch of small servers to share power supplies, fans, and even networking links. Cisco Systems' (NASDAQ:CSCO) first server products are a good example of this.
  • Perhaps most importantly, the power consumption of the modern data center has been spiraling out of control. One study estimated that the average data center saw its power usage double from 2000 to 2005 -- and from all indications, it's kept growing since. At a time when energy prices are still high by historical standards, this means that there are major savings to be had from using less power-hungry systems (not to mention fewer headaches for IT guys trying to keep their hardware running cool).

When there's a Google, there's a way
Put all of this together, and it's no surprise that less powerful systems using Windows or Linux, and typically running on Intel Xeon or Advanced Micro Devices (AMD) Opteron chips, have been steadily taking share from more expensive UNIX systems. But a lot of companies are looking to go cheaper still. There's probably no better example of this than Google. The biggest Web company of all serves Web pages using hundreds of thousands of cheap, homemade servers, typically running older, low-power Intel PC chips. Amazon.com and Facebook are also in on this trend, deploying thousands of inexpensive servers from companies like Silicon Graphics. And if you take a look at Silicon Graphics' low-end server line, you'll see that in addition to offering Xeon and Opteron servers, they also offer systems running AMD desktop chips and, yes, the Intel Atom.

With companies like Google, Amazon, and Facebook comfortable having their businesses depend on such low-cost hardware, it's no surprise that other, more conservative companies are also taking the leap. As this trend continues, it's bound to cause headaches for Oracle, which is on the verge of acquiring Sun, a company still very dependent on high-end system sales. HP should fare better: While the company sells a lot of high-end gear, it also sells a lot of cheaper systems and is the undisputed leader in the blade server market. IBM and Dell are likely somewhere in between. IBM is pretty dependent on the high-end market, but they've been competing well in this space, and their mainframe customers generally aren't the type to consider switching to the cheap stuff. Dell, on the other hand, is known as a low-end server company that sells Intel and AMD gear, but it's also known as a commodity brand. And as SeaAtom and Silicon Graphics would be glad to tell you, packing cheap servers together in high densities requires some technological know-how.

Déjà vu for Intel and AMD
As for Intel and AMD, the server industry's shift to less powerful chips is bound to create some gross-margin headaches. While the most expensive Xeon and Opteron processors can sell for more than $2,000 apiece, the cheapest PC microprocessors go for less than $100. Atom chips, meanwhile, can go for less than $50. And even if a company decides to stick with Xeons or Opterons, but goes for servers containing only one processor instead of four or eight, the chips for single-processor servers often cost a fraction as much as those used in bigger systems.

Both Intel and AMD have suffered through their share of margin squeezes in the PC microprocessor market as PC average selling prices moved lower. They now stand a good chance of seeing the same thing happen in a fast-changing server market.

Eric Jhonsa still has fond memories of playing Madden '96 on his old Pentium machine. He has no position in any of the companies mentioned. Google and VMware are Motley Fool Rule Breakers picks. Apple and Amazon.com are Motley Fool Stock Advisor picks. Intel is a Motley Fool Inside Value pick. The Motley Fool has a disclosure policy.