Sun, a one-time dot-com darling that has lost more than $5 billion since the tech collapse, said Monday it would begin building and shipping later this year servers and workstations that run on Intel processors.
Intel, trying to reverse plunging profits and market-share losses to archrival Advanced Micro Devices Inc., will officially endorse Sun's Solaris operating system in return.
Analysts said Intel's backing will be crucial in Sun's effort to gain more widespread adoption of its servers and software.
And Sun's embrace of Intel chips marks a timely design win for Intel, whose processors were shunted aside by Sun several years ago in favor of chips from AMD.
Intel, the world's largest chipmaker, has lost about 5 percent of the overall chip market to AMD over the past year, with AMD posting dramatic gains in the high-margin markets for servers and laptop computers that Intel once enjoyed nearly alone.
But Intel has revamped its product line with a new chip design to boost performance while giving off less heat, and analysts said deals like the one with Sun reflect a growing demand for Intel's new offerings.
"We see'07 as the year of Intel everything is working in their favor now," said Larry Cao, a semiconductor equity analyst with Morningstar.
The CEOs from both SantaClara-based companies, Jonathan Schwartz with Sun and Paul Otellini with Intel, jointly announced the deal in San Francisco.
Both executives stressed the collaborative nature of the partnership and said the deal is about expanding market opportunities in areas where both companies have been weak.
Otellini said the two companies agreed to try to find common ground while negotiating the terms of the new partnership.
"This is not just a commercial endeavor," Otellini said in an interview with The Associated Press. "This is a deep, cooperative effort. If you look at both companies, they both have a strong legacy of technology innovation. We're now able to do that in a collaborative fashion."
The deal represents a dramatic about-face for Sun, which several years ago began relying exclusively on Sunnyvale-based AMD to provide the processors for servers based on the popular x86 design. Intel used to provide chips to Sun for that type of server, but Sun phased them out over concern about their high energy consumption.
Under the new deal, Intel will again make chips for Sun for servers based on the x86 design, though Sun will continue to use AMD products as well.
Analysts said the competition is likely to bring down Sun's prices and help the company broaden its customer base.
"Sun's a company that has a strong will and oftentimes blazes its own trail," said Crawford Del Prete, a senior vice president with market research firm IDC. "This is a way for Sun to accomplish a number of things with one stroke. It broadens the product line, it attracts customers loyal to the Intel product line, and it also increases adoption of Solaris. Intel's backing is important to win the confidence of customers."
AMD said in a statement that Sun remains a "strong, strategic partner" and that the deal ultimately serves the market demand for choice by driving innovation, differentiation between competing products and increased value to customers.
Though AMD has been gaining share at Intel's expense, Intel has slashed prices and the pressure appears to have taken a toll on AMD.
AMD is scheduled to report fourth-quarter earnings today and has warned investors that plunging processor prices would "substantially" reduce operating income for the quarter. Sun is scheduled to report its fiscal second-quarter earnings today.
Investors had a muted reaction to the news of the Sun-Intel partnership.
Intel's shares were down 3 cents to close at $20.79 on the Nasdaq Stock Market, while Sun shares slipped 2 cents to $5.75 on the Nasdaq.
Analysts said part of the ho-hum reaction was because of Sun's relatively small size in the global server market.
Sun is ranked fourth in terms of worldwide server sales revenue, commanding about 10 percent of the market behind larger rivals Hewlett-Packard Co. of Palo Alto, International Business Machines Corp. and Dell Inc., according to data from Gartner Inc.
However, analysts said the deal was nonetheless an important milestone in the semiconductor and server industries that could help both companies prosper.
Schwartz, the Sun CEO, said the partnership with Intel was about reaching developers who build applications on Intel microprocessors and in turn driving sales for Sun.
He also stressed the long-term technology development aspect of the deal, which he said will lead to innovations for both companies far out into the future.
"This is a tectonic shift in the marketplace," Schwartz told the AP. "This really is a landmark relationship that's about growing the market and not simply the customer-supplier relationship. This really does change the face of the industry."