Intel's Purchase of Altera Defends Its Data Centre Dominance

Intel's biggest acquisition ever will let the Santa Clara, California company offer twice the computing power when its Xeon processors used in servers are combined with Altera's programmable chips.

With a stagnant PC industry and little progress in smartphones, selling high-end server chips is an increasingly important source of profits.

"This whole deal is defensive for the data centre," said Bernstein analyst Stacy Rasgon, who saw it as an admission by Intel that it was getting harder to drive performance gains.

He questioned Intel's projections for the programmable chip market, which is built on data centre use and growing adoption of Intel chips in everyday objects connected to the Internet. "I think their growth goals are ludicrous," he said. "They think it's going to grow 7 percent a year, but Altera shrunk 2 percent a year in the last three years."

Still, big data companies such as Google, Facebook and Microsoft are all tweaking their servers to get their data centres to run faster and more efficiently. Microsoft has tried using programmable chips combined with Intel's Xeon processors.

Altera's chips, called field-programmable gate arrays (FPGA), can be configured as needed to make servers faster at handling proprietary tasks, like providing web-search results or updating social networks.

"You can put your software down into the silicon," Intel chief executive Brian Krzanich told CNBC in an interview.

Intel, which analysts estimate has more than 90 percent of the data centre market, already has an agreement to use Altera chips. Its move comes as companies such as Qualcomm Inc, using ARM Holdings -designed chips and the soon-to-be merged Avago Technologies and Broadcom Corp, also target the data centre market.

By buying Altera, Intel avoids the risk of being dropped as the smaller company's manufacturing partner, which had been the subject of some speculation, said Gartner analyst Mark Hung.

The purchase means Intel is hedging against the likelihood that the rise of FPGA chips will reduce the need for central processing unit (CPU) chips running servers, where Intel currently dominates.

"This way Intel will profit if customers use FPGAs instead of CPUs," said FBR Capital markets analyst Christopher Rolland. "Intel will be the only company that will be able to combine x86 server CPUs with FPGAs onto a single die. This could eventually be a $1 billion market, with the lion's share going to Intel."

© Thomson Reuters 2015