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Sun, Intel to Partner on Server Chips

Sun Microsystems Inc. will begin building a line of servers that run on chips from Intel Corp. and will receive Intel's endorsement of Sun's Solaris operating system, executives from both companies said Monday.

The long-term alliance, announced by Sun Chief Executive Officer Jonathan Schwartz and Intel CEO Paul Otellini, was seen as a sizable victory for both companies as they fend off threats from competitors in the high-margin server market.

Sun, which plans to begin shipping the Intel-based products in the first half of this year, said the companies are currently working on ways to improve and expand the market presence of Solaris.

Both executives stressed the collaborative nature of the deal, which teams up two companies known for their heavy investment in research and development even during tough financial times.

"This is a market-changing event," Schwartz said on stage with Otellini. "This totally changes the perspective the customer has on how they can do business with Sun and similarly how they can do business with Intel."

The deal marks a major design win for Intel. The world's largest chip maker has been fighting to reverse plunging profits and regain market share lost to archrival Advanced Micro Devices Inc. AMD stole more than 5 percent of the overall chip market away from Intel in the past year, according to Mercury Research.

For the past few years, Sun has relied exclusively on AMD chips for servers based on the popular x86 architecture, or design, used in many personal computers and servers.

Intel itself once provided chips to Sun for those same systems, but its chips were seen as consuming too much energy and were pushed aside in favor of AMD's offerings. Under the new partnership, Intel will again begin providing chips for those servers.

Otellini said the two companies agreed to try to find common ground while negotiating the terms of the new partnership.

"This is not just a commercial endeavor," he said in an interview with The Associated Press. "This is a deep, cooperative effort. If you look at both companies, they both have a strong legacy of technology innovation. We're now able to do that in a collaborative fashion."

The alliance also is a sizable victory for Sun as the company continues its long climb back to profitability following the dot-com collapse and seeks more mainstream adoption of its servers and software products.

The Santa Clara-based company, which is scheduled to report its quarterly financial results Tuesday, has lost more than $5 billion since 2002, after tech-related spending dried up and demand plummeted for high-priced servers like Sun's.

Analysts said Sun should get a major boost from Intel's endorsement of the Solaris operating system because many servers that use chips based on the x86 design often now run rival operating systems, namely Linux or Microsoft Corp.'s Windows.

Larry Cao, an equity analyst with Morningstar, considered the deal an incremental victory for Intel and a crucial move for Sun to stay competitive as more customers demand Intel's new line of chips.

"We see '07 as the year of Intel -- everything is working in their favor now," Cao said. "They're back on top, their product line is strong, and they're gaining customers. This is one example _ they finally penetrated this one account that was purely AMD. That's a major score for them."

The market's reaction to the deal was muted.

Intel's shares were down 3 cents to close at $20.79 on the Nasdaq Stock Market, while Sun shares slipped 2 cents to $5.75 on the Nasdaq.

Some analysts said the size of the deal was not enough to stoke investors to act. There were lingering questions about how profitable the alliance would be for Intel, considering Sun's relatively small slice of the global server market, analysts said.

Sun is ranked fourth worldwide in terms of server revenue, commanding about 10 percent of the market behind larger rivals Hewlett-Packard Co., International Business Machines Corp. and Dell Inc., according to data from Gartner Inc.

Still, analysts said the deal marks an important industry milestone for both Sun and Intel and strengthens their positions in areas of the market where both have suffered.

Crawford Del Prete, a senior vice president with market research firm IDC, said the deal could prove to be an important piece of Sun's turnaround efforts. The company will benefit mightily from Intel's backing as it seeks to muscle further into the lucrative global server market, he said.

"Sun's a company that has a strong will and oftentimes blazes its own trail," Del Prete said. "This is a way for Sun to accomplish a number of things with one stroke. It broadens the product line, it attracts customers loyal to the Intel product line, and it also increases adoption of Solaris. Intel's backing is important to win the confidence of customers."< >