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Sun, Intel Make A Deal

Server and software maker Sun Microsystems Inc. has agreed to use chips from Intel Corp. in some of its servers and for Intel to endorse Sun's Solaris operating system, officials from both companies said Monday.

The alliance was announced at a joint news conference with Intel Chief Executive Officer Paul Otellini and Sun CEO Jonathan Schwartz after the news leaked Sunday evening.

"This is more of a psychological and public relations win for Intel," CBS News techonology analyst Larry Magid said. "Certainly they're going to get some revenue from Sun, but another benefit is they're taking business away from AMD (Advanced Micro Devices Inc.)."

It is also 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.

Sun shares were down 8 cents, or 1.4 percent, to $5.69, in midday trading Monday on the Nasdaq Stock Market, while Intel's stock price increased 1 cent to $20.83.

Some analysts noted that Sun does not consume the volume of microprocessors as some of its competitors, such as Hewlett-Packard Co. and International Business Machines Corp., and it remained unclear how much Intel stood to profit from the partnership.

Nonetheless, 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 partnership comes amid an intensifying fight for market share between Intel and AMD.

Both companies have been slashing prices and incurring heavy expenses to transition to a more advanced manufacturing technology that will allow them to shrink the size of the circuitry on their chips.

They have also been waging a tight battle for market share that has been particularly painful for Intel, whose previous generations of chips began falling out of favor for their high energy consumption.

Last year, Intel lost more than 5 percent of the overall computer chip market to AMD, according to Mercury Research. Longtime Intel loyalist Dell Inc. said it would also begin using AMD chips in its PCs and servers.

Some of AMD's most dramatic market-share gains have come in the high-margin server and laptop markets, areas where Intel traditionally had little competition.

However, Intel, which still commands about three quarters of the overall chip market, fired back at AMD last year by unveiling a new line of chips based on an upgraded design that industry observers cheered for delivering higher performance while giving off less heat.

The competitive pressure appears to be taking its toll on AMD, which is scheduled to report fourth-quarter earnings on Tuesday and has warned investors that plunging processor prices would "substantially" reduce operating income for the quarter.

AMD's focus on energy-efficiency helped the company lure away clients like Sun while Intel was still overhauling its product line.

AMD and Sun entered into a partnership in 2003, and in recent years Sun has relied exclusively on AMD to supply server chips based on the popular x86 microarchitecture, or design, used in many personal computers and servers.

Intel was also providing processors for Sun's x86 server line at the time, but was pushed aside out of concerns about the chips' power consumption.

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