Intel Might Sell CPU Subscriptions For Servers Soon

| About: Intel Corporation (INTC)
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Intel (NASDAQ:INTC) has been busy researching new and innovative designs for servers. The company's vision for servers is to bring "Rack-scale architecture" to break apart the elements of a server and make them modular. Intel started this vision with Project Scorpio Rack with partners Tencent, Baidu, Alibaba, and China Telecom shifting fans and power supplies from individual servers to the rack architecture. A prototype for the next phase of this vision was released at the Open Compute Summit in January of 2013. The prototype was the photonic rack which features technology from Intel, Facebook (NASDAQ:FB), Corning (NYSE:GLW), and Quanta Computer. The photonic rack takes advantage of silicon photonics which uses light to move enormous amounts of data at very high rates of speed. "Intel's prototype can move data at up to 100 gigabits per second (Gbps), a speed that allows components to work together even when they're not in close proximity to one another."

This technology opens the door to disaggregate the components of the server spreading them across the rack. The prototype separated the components into their own server tray. So the server system could have one tray for storage and another tray for the Intel Atom CPUs, and so forth. This architecture utilizing silicon photonics and lasers is far more energy efficient then copper wires and will allow for few cables and greater bandwidth. This design will also allow for the tray of CPUs to be swapped out once the next generation CPU is released instead of having to replace the entire server system. This will lower the costs of upgrading the processors of the server and will create the opportunity for these customers to be on a subscription for CPUs from Intel.

The idea of selling subscriptions has really caught on in the past several years. It makes sense for items that you need on a regular basis making it convenient for the customer who can automate the ordering of whatever product he or she has a subscription for. It is good for the company because it delivers a steady and predictable stream of revenue and also provides clear direction in how much is needed before actually manufacturing anything. This makes the production side of the company very efficient and effective and minimizes inventory costs. It also allows for the possibility of upgrading the CPUs for servers with every release of a new generation instead of upgrading the server system every 3-5 years. This could potentially triple the revenue from the server CPU market as vendors move to a subscription model for delivery of the most recent generation of the CPUs at a fairly minimal cost compared to replacing the entire server.

Intel will release the designs for these new servers to all vendors at no cost. It is in Intel's best interest to have these designs, or a variation of them, to become the norm for the server market. This design will allow the CPUs to be upgraded at a fairly minimal cost when compared to replacing the entire server system. Let's take Hewlett-Packard's (NYSE:HPQ) Moonshot system for an example. This system will utilize 45 Intel Atom Processors with an estimated price of $55 each (Moonshot). The system itself is going to cost around $62,000 while the cost to upgrade the CPUs would be $2,475 (Microservers). $2,500 annually per server to receive the latest generation CPUs for your servers is very inexpensive and well worth it in performance and energy efficiency enhancements. I feel like companies will jump at the chance to go to a subscription model for the CPUs of their server systems.

When I was the administrator for a small Tribal government, my Network Administrator told me we needed to upgrade our server system every 3-5 years because it will have become obsolete. This new photonic server design will allow companies to upgrade the CPUs for a fraction of the cost of the server annually, which according to the server life-cycle implies possibly tripling the market for these CPUs.

This silicon photonic design is very promising for Intel and could lead to tremendous increases in the revenue from Intel's Data Center Group and further leverages the value of the trend toward cloud computing and increases in intelligent systems. Intel is once again demonstrating the immense value of its research and development to the company and the market. I am very optimistic that Intel's Data Center Group revenues will grow substantially in the next several years. I have always been bullish on Intel because of the upcoming boom in mobile I believe Intel will soon be experiencing but now also because of the company's continued drive for dominance in the server market as well. I may need to further revise my estimates for Intel's future earnings upward based on this new technology.

Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.