The next chip battleground: Data centersDecember 12, 2012: 5:00 AM ET
Diminutive smartphone chips will help power-hungry data centers cut down on costs.
FORTUNE -- The next time you upload a photo to Facebook, consider this: All those pictures have to be processed and stored somewhere, presumably forever. Some 3 million data centers occupy more than 600 million square feet of space in the U.S. alone to help do so. Trouble is, a single location can slurp as much power as a medium-size town, or about 10.5 million watts, according to Jonathan Koomey, a researcher at Stanford University. Data centers already account for 2.2% of America's total electricity consumption. That is making for hefty utility bills at firms that rely on them -- especially data-heavy web services such as Amazon (AMZN) and Google (GOOG).
The culprit for this surge? Smartphones. High-end devices like the iPhone have already outnumbered traditional cellphones in the U.S. this year, according to Nielsen. Users have flocked to data-intensive activities like sharing high-resolution photos and video, surfing the web, and downloading apps. Hence the boom in power-hungry data centers.
In an unexpected twist, smartphones may be the answer to the problems their very popularity helped create. Chips once found exclusively in cellphones are making their way into the building blocks of traditional data centers, like servers. It turns out that such chips may be particularly well-suited for today's high-frequency, in-the-cloud computations -- the billions of Internet searches processed each day, for example. They also consume less energy than traditional server chips -- one-tenth as much, in fact.
Chipmakers, meanwhile, are positioning themselves to find new, lucrative lines of business as PC sales decline and mobile devices increasingly dictate trends. The traditional server market reached $52.8 billion worldwide last year, according to research firm Gartner. In November, longtime Intel boss Paul Otellini announced he would step down in early 2013, making way for a new chief executive to deal with the dicey transition to lower-power chips.
U.K.-based ARM Holdings (ARMH), which licenses its popular processor architecture to mobile-chip manufacturers like Qualcomm (QCOM), has ramped up efforts to get its designs into data centers dominated by Intel (INTC). ARM's microprocessors are currently found in more than 90% of all smartphones. But the company recently announced a so-called 64-bit version, a signal to engineering types that its devices can handle large amounts of memory -- key for use in data centers.
Major companies like Advanced Micro Devices (AMD) and Hewlett-Packard (HPQ) are turning to such designs as well. AMD is expected to ship its first ARM-based products in 2014. Smaller players are joining in too: Austin-based startup Calxeda is focused on selling to financial services and cloud-computing providers like Rackspace as well as social media companies -- large companies with large data centers. "Their power bill is excruciating," says Karl Freund, Calxeda's vice president of marketing. (Calxeda has over $100 million in backing from the likes of Highland Capital Partners and Battery Ventures.)
Even Facebook (FB) -- known for assiduously custom-designing its data centers from the ground up -- has tested the use of alternative chips in servers. "As more and more of what we do shifts to the cloud, more and more companies are seeing the future value in this technology," notes Jay Parikh, Facebook's vice president of infrastructure engineering.
Still, data centers aren't likely to change overnight. Server software providers, for one, will have to be goaded into rewriting their code so that it is compatible with ARM's technology. That may prove costly and time consuming until chips designed by the company are widely used.
The biggest difficulties may come from chipmakers themselves. Already, Intel and rival ARM are squabbling. Intel claims ARM licensees are targeting just 10% of the overall server market -- a segment known as "microservers." ARM says that's not so. It counters it will own 20% of the total server market by 2020. Of course, Intel has its own road map for lower-power chips, for both mobile and server markets. "Intel is huge and very powerful, and they own 95% of the [current server] market," concedes Calxeda's Freund. He believes customers want more choices.
Whichever camp wins -- ARM or Intel -- lower-power processors will make their way into data centers during the next few years. Another thing is for sure: The number of smartphones will continue to explode. That makes it unlikely anybody will stop uploading photos to Facebook -- and driving even more traffic to server farms -- anytime soon.
This story is from the December 24, 2012 issue of Fortune.