Compaq and Samsung in Deal to Save Alpha

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Event Summary

December 13, 1999 - Compaq Computer Corp. and South Korea's Samsung Electronics Co. Ltd. are planning to announce Monday a preliminary agreement to spend $500 million to advance the manufacturing and marketing of Compaq's 64-bit Alpha microprocessors and computer systems. The "memorandum of understanding" is aimed at expanding Alpha into new markets such as fixed-function servers, network appliances and Internet network infrastructure, Compaq executives said. Samsung, which owns 87 percent of Alpha Processors, builds the chips under a Compaq license. Compaq, which also owns a small stake in API, won't expand its ownership, Compaq vice president Jesse Lipcon said.

The deal comes as Compaq has been trying to improve its Alpha-based minicomputer line, retargeting its marketing efforts to technical and high-performance computing niches. It recently decided to quit selling the systems with Microsoft's Windows NT software, thus abandoning the general-purpose market. Analysts and computer executives said Compaq needs to invest to repair the tarnished image of the Alpha technology, which it acquired when it purchased Digital Equipment Corp. in June 1998. Alpha chips were once hailed as a speedier alternative to Intel's microprocessors in general-purpose computers. Samsung has committed to developing technologies that will boost chip performance. Samsung is the largest supplier of 64-bit Alpha microprocessors. He said the $300 million includes Compaq's purchases of Alpha chips from Samsung during the next 12 months; an undisclosed amount that Samsung will pay for the new licensing rights; and the creation of a fund to invest in Linux software makers and promote the use of Alpha-based computers.

Market Impact

Markets primarily affected are the high-end technical computing and server markets. The incorporation of Linux is an attempt to bring Alpha into more mainstream computing environments. Compaq/Samsung have also expressed an intent to move Alpha into areas such as network appliances, but Alpha's present cost structure does not make this a simple task. If Compaq can leverage Linux into a significant sales increase for Alpha-based systems, this will drive Alpha costs down, leading to further mainstream market penetration.

Although aggregate sales figures for Alpha-based systems are estimated at $3 Billion for Tru64 Unix and $4 Billion for OpenVMS systems, these numbers are potentially deceiving. OpenVMS, although a solid, powerful, robust OS, is primarily considered a legacy system, and its revenues are not likely to increase. Tru64 Unix is also powerful, but will be fighting for market share with IA-64 systems. $7 billion is a lot of revenue, but if this initiative is not successful - especially the Linux aspect - then Alpha's days may be numbered as a CPU alternative to Intel. (See TEC Technollogy Research Note: "Compaq's Alpha - Moving Toward Its Omega?" August, 1999) Thus, it behooves Compaq to commit fully to making this effort a success. If Compaq is not willing to do what it takes to make Alpha a cost-effective alternative, as well as a volume player in the marketplace, then it should either sell off the remainder of Alpha to someone who will commit, or cut their losses.

User Recommendations

Despite its previous problems (mainly marketing-related, vs. technology-related), the Alpha CPU is still a good piece of hardware. However, users should adopt a "wait and see" attitude with this announcement. No products are announced, no pricing structure is in place, only expressions of intent. Purchasing decisions should not be affected by this announcement.

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