Sun and Intel sign a win-win deal

According to sources, Sun Microsystems Inc. (NASDAQ:SUNW) is about to announce it will be using Intel Corp.'s (NASDAQ:INTC) chips in some of its servers. Intel will be endorsing Sun's operating system, Solaris, in return.

Intel has been losing market share to Advanced Micro Devices Inc. (NYSE:AMD) and more than anything, this deal is a major blow to the smaller chip company that has been making strides and gaining share from its larger rival and dominant market player, Intel.

Both Intel and AMD have been cutting prices in an attempt to increase their market share, and up until the latest generation of Intel's chips, AMD's were considered better. Dell Inc. (NASDAQ:DELL), for example, has started offering AMD chips PCs. AMD gained shares especially in the high margin laptop and server markets. But the latest version of Intel chips dampened that growth as it is considered better than AMD's.

Despite Intel losing more than 5% market share to AMD in 2006 according to Mercury Research, AMD, in fact had already warned of a weaker fourth quarter. AMD will continue selling some chips to Sun, but Banc of America Securities analyst Sumit Dhanda estimates it will lose $25-$50 million in revenue following the Sun-Intel deal.

Sun will be using Intel's Xeon processors for its fast-growing x86-based server product lines and other than being a win to Intel, the partnership is also seen as a win for Sun as it climbs back to profitability. The chips based on the x86 design usually run on Linux or Microsoft Corp.'s (NASDAQ:MSFT) Windows operating system. Therefore Intel's endorsement of Sun's Solaris is considered a Sun victory.