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The Chip
Wars Are Over By Jeffrey Newman
Mending Fences, Corralling the Market
The deal also calls for a royalty-free patent cross-licensing agreement covering microprocessors, systems and software technologies. "The (chip) game is over," says John Geraghty, an analyst at Credit Suisse First Boston. "The Merced is the Intel de facto chip of choice. For Sun to produce a separate chip from Intel is futile." The stock reacted to the news with mixed results. Intel closed down 15/16 at 72 1/8, while Sun closed up 1 5/8 at 35 1/8. The latter traded on extremely high volume of 10.2 million shares, up from its 30-day trading average of 6.2 million shares. A Captive Audience The deal bodes well for Intel, which now adds another vendor notch to its Unix pistol, and furthers its quest to provide the dominant PC-chip architecture in high-end computers. "This just brings Intel one step closer to being a true monopoly in the chip area and being the Microsoft of its sector," says Alex Karamanoglou, president of NGA.Net, an Internet consulting firm. "There are a handful of smaller guys left, like Cyrix, but Intel is clearly headed into Microsoftdom." Sun is essentially hedging its bets. It would likely have seen a drop in demand for its chips as the Merced gains acceptance. The deal is a way to protect itself from that. Without the alliance, the company was running the risk of becoming another Apple, offering a microprocessor incompatible with other systems and, therefore, of interest to only a small minority of users. Sun Burn? "Sun doesn't win, but they don't lose," says Chris Chaney, semiconductor analyst at A.G. Edwards. He says by joining with Intel, Sun reduces competition and reduces the risk of its Ultrasparc microprocessor not succeeding. "It helps ensure that Sun stays in the ball game," adds Daniel Niles of BancAmerica Robertson Stephens. "The fact that its guts may have Merced technology is a big plus, and could help further its software sales." Overall though, the deal doesn't mean a great deal for investors. The chips will not be available until 1999 and will only be installed on high-end systems. The agreement will have little to no effect on immediate earnings. It is, however, part of Intel's long-term positioning plan. And, as the cost of the chips come down over then next two or three years, they will be rolled into the consumer PC market, which will have a significant earnings implications. 
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