HP’s Itanium gambit

Perhaps the most controversial mandate to come out of the Hewlett-Packard/Compaq merger was the decision to pull the post-merger HP out of the CPU business. Compaq’s Alpha and HP’s PA-RISC processors would be phased out by the middle of the decade.

After that, all HP servers would feature one of two architectures: Intel’s 32-bit x86 (Pentium and Xeon) or Intel’s 64-bit Itanium. Despite HP’s spin, Itanium 2 is not a sure thing and faces an uphill battle against IBM’s architecture.

HP didn’t base its Itanium decision on current market conditions. Today, the Palo Alto, Calif.-based company enjoys a healthy share, about a third, of the 64-bit-server market with systems based on PA-RISC and Alpha chips. HP executives predict that, within the next few years, the 64-bit market will whittle down to two players: HP and IBM. HP feels the Itanium architecture will give it the strongest hand against IBM’s Power CPU.

Itanium 2 is not a slam dunk in terms of performance, at least according to published Standard Performance Evaluation Corp. (SPEC) CPU benchmarks. IBM’s latest Power4+ processor has significantly better integer performance than Itanium 2 but lags Intel’s processor in floating-point operations.

SPEC benchmarks don’t paint the whole picture, but HP is wise to be wary of IBM. The Power4+ processor architecture is a strong and scalable performer, and recent price cuts bring the purchase cost of Armonk, N.Y.-based IBM’s midlevel Power servers down to extremely competitive levels. IBM also has the redesigned Power5 CPU slated to ship in 2004, and the company is prepared but not committed to manufacture servers based on AMD’s 64-bit Opteron processor.

Hardware Do-Si-Do

Intel pitched IBM twice on its 64-bit architecture, once each for Itanium and Itanium 2. IBM would have made a powerful ally, but IBM walked away from the table both times. Even with Power’s troubled past — especially the strained, unproductive relationship with partner Motorola — Itanium and Itanium 2 struck IBM as inferior architectures. Considering how much easier it would have been for IBM to buy into Itanium 2 than to revitalize the stymied Power effort, IBM must have given the matter serious consideration before turning its back on Intel. Earlier this year, IBM inked a pact with Sunnyvale, Calif.-based AMD for chip fabrication, establishing a relationship that could protect IBM if Intel retaliates by raising prices on, or limiting the supply of, 32-bit x86 processors to IBM.

HP believes it has a powerful advantage over IBM: Windows. Itanium is the only 64-bit architecture that was supported by Windows Server 2003 at its launch date in April. That arrangement reflects a considerable warming of relations. Microsoft was unhappy with Intel’s emphasis on Linux and HP-UX when the original Itanium was introduced. Microsoft withheld its public commitment to Windows on Itanium until well after Intel’s launch, a move that undoubtedly hurt Intel’s ability to sign Itanium hardware and software partners.

Microsoft is now loyal to HP, Intel, and Itanium 2. The mid-2003 rollout of HP’s Itanium 2 server lineup will mark the true commercial debut of the Itanium architecture. HP is not abandoning HP-UX. It will also continue to support the development of Linux for Itanium. Despite HP’s long and profitable run as a Unix leader, the company now regards Windows as Itanium 2’s killer app.

For HP, much depends on there being strong relations between Microsoft and Intel and weaker partnerships among Microsoft, AMD, and IBM. So far, things are going HP’s way. In 2002, Microsoft Vice President Brian Valentine was outspoken in his opinion that AMD’s 64-bit architecture is superior to Itanium. It’s incredibly easy to adapt software to Opteron — IBM and Computer Associates both claim to have ported gigantic code bases (the DB2 and Ingres database management systems, respectively) in two days. It’s widely suspected that Microsoft could have shipped 64-bit support for Opteron in the initial release of Windows Server 2003. Instead, Microsoft put out a lukewarm press release stating that a beta version of Windows for the 64-bit Opteron would be available later this year.

At least for now, Microsoft is using its clout to swing the 64-bit fight in Itanium’s direction. HP is the primary beneficiary of that effort.

The Blue Gorilla

The showdown IBM is waiting for is next year’s battle between HP’s Itanium 2 servers and IBM’s Power5 platform. IBM is cocksure that Power5 will outperform HP’s enterprise flagship. That is highly likely, but HP is betting that by the time Power5 gets to cruising altitude, the market won’t care how fast it is. Just plain fast is fast enough, and both Itanium 2 and Power5 will meet that test.

By playing Compaq’s reputation and huge installed base, HP has the potential to make itself the volume leader in 32-bit Windows servers. By playing its close ties to Intel and Microsoft, HP can become the profit leader in the 64-bit Windows server market. HP has to spin Power’s inability to run Windows as a liability. For its part, IBM can point to far more 64-bit software available for AIX and Linux than for Windows on Itanium. IBM will undoubtedly hedge its bets with Itanium Windows editions of DB2, WebSphere, Tivoli, and Lotus software.

HP is not assured success, but its strategy appears sound. Treating IBM’s Power as the sole competition conserves HP’s technical and marketing resources and pushes the market toward consolidation, a path HP believes will put it in the lead. By narrowing its server platform choices to x86 and Itanium and by aggressively emphasizing Windows, HP can focus finances and intellect on one sharply defined point.

IBM’s strategy, on the other hand, looks scattered; a catalog of its computing solutions would be as heavy as the Los Angeles phone book. But IBM is no pussycat. It vows Power will push Itanium out of the market. Investing in Opteron could prove profitable, forcing Intel to drop prices on Xeon and possibly hurting HP with two- to eight-way 64-bit servers that sell for a fraction of Itanium’s cost.

With the backing of Intel and Microsoft, HP will throw a punishing first punch in the second quarter of 2003. But only a fool would bet that its match with IBM will end in the first round.