Intel announced today that it is shipping its first low-power Atom microprocessor designed specifically for a new breed of servers dubbed “microservers.”

These lightweight and efficient microservers, pioneered by startup SeaMicro (now owned by Intel’s rival, Advanced Micro Devices), are aimed at large-scale data centers that serve huge numbers of web pages to Internet surfers.

Intel’s new chip is a 64-bit dual-core Atom processor that operates on 6 watts of power. The world’s biggest chip maker is scaling down from its normal server chips, the 17-watt Xeon processors, in order to attack this low-end part of the market. But it has to engage in a tough balancing act so that the Atom chips do not cannibalize the high-end, more lucrative Xeon processors.

The new server chip, dubbed the Intel Atom processor S1200, has features for servers such as error correction, 64-bit support, and virtualization technologies. It also sells at a lower cost and can be packed more densely into energy-efficient server cabinets.

In this respect, Intel is better prepared for this market than AMD. Intel’s chips were used in SeaMicro’s first microservers a few years ago, but they were not tailor-made for the task. Then AMD bought SeaMicro for $334 million earlier this year and obtained its key technologies, such as a fast-switching technology, that are useful for microservers, beyond the core processing chip.

Intel said more than 20 designs are in the works based on the new S1200 chips

HP said its next-generation Gemini servers, shipping next quarter, will launch with the Atom processors. Software providers such as Oracle and Red Hat are supporting the launch.

“The data center continues to evolve into unique segments and Intel continues to be a leader in these transitions,” said vice president and general manager of Intel’s Datacenter and Connected Systems Group, Diane Bryant (pictured). “We recognized several years ago the need for a new breed of high-density, energy-efficient servers and other datacenter equipment.”

“Organizations supporting hyperscale workloads need powerful servers to maximize efficiency and realize radical space, cost, and energy savings,” said Paul Santeler, vice president and general manager of HP’s Hyperscale Business Unit for Industry-standard Servers and Software. “HP servers power many of those organizations, and the Intel Atom processor S1200 will be instrumental as we develop the next wave of application-defined computing to dramatically reduce cost and energy use for our customers.”

Intel’s next-generation Atom microserver chip, code-named Avoton, will be available in 2013. The S1200 costs $54 in quantities of 1,000 or more.

Back in the spring, it was no surprise that AMD would still be selling SeaMicro’s microservers with Intel chips. But today, AMD’s SeaMicro division launched its brand new SeaMicro SM15000 server, which runs with Intel’s E3-1260L Sandy Bridge-based processor. In November, AMD will start shipping new machines with a new generation of AMD Opteron processors with AMD’s Piledriver core as well as Intel’s Xeon E3-1265Lv2 Ivy Bridge processor. In other words, AMD is accommodating SeaMicro’s existing customers by shipping whatever processor that want, even if that gives some business to Intel.

SeaMicro’s small and power-efficient computers enable enterprises to cram more computing power into a given amount of space and use a lot less electrical power. That cuts electricity bills, the largest cost of operating a data center. Using Intel Atom processors, SeaMicro had become the fastest-growing system company in Silicon Valley history before AMD bought it. SeaMicro’s customers include France Telecom, Skype, Rogers Wireless, Mozilla, eHarmony, and China Netcom BB. Hundreds of millions of internet users traverse SeaMicro’s hardware daily.

As we’ve described in earlier stories, Intel has been improving its server microprocessors by making them more power efficient. But the microprocessor only accounts for a third of the power consumption in a server. SeaMicro’s innovation lies in how it attacks the remaining two-thirds of the power consumption problem. It does so by combining a lot of the extraneous chips into a single, more-efficient custom chip. With the low-power cores, SeaMicro can now fit thousands of cores and also 5 petabytes of storageinto a single microserver.

“The rise of virtualization, cloud computing, and big data require a new generation of compute in which networking and storage are equal partners in the solution. This does not fit the mold of traditional servers,” said Andrew Feldman, general manager and corporate vice president of the Data Center Server Solutions group, AMD. “We are at the beginning of a new wave of computing that requires data centers to become pools of computing and storage resources with the flexibility to expand in both dimensions.  The SM15000 system removes the constraints of traditional servers and allows data centers to expand compute, networking and storage independently. By supporting the newest generation of processors, the SM15000 server will continue our tradition of being the highest-density, and most power efficient micro server in the market.”

The new SeaMicro SM15000 server can fit 512 cores in a ten-rack system. Each system has 64 slots for server cards. Diane Bryant, head of Intel’s data center server chip business, said about the AMD use of Intel server chips, “We love all customers. We are happy to sell Intel Xeon chips to anyone.”

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Advanced Micro Devices is acquiring Sea Micro today for $334 million, including $281 million in cash. Sea Micro has been disruptive because it can pack a lot of computing power in a server rack that is about a sixth of the usual size. Its servers use a quarter of the usual electricity and cost a lot less.

The servers use Intel’s Atom microprocessors, which are targeted at energy efficient devices such as tablet computers. But AMD’s move could shake things up for Intel, which presumably will lose some of its business.

The advantage of Sunnyvale, Calif.-based SeaMicro’s small and power-efficient computers is that enterprises can now shove a lot more computing power into a given amount of space and use a lot less electrical power, thereby cutting electricity bills dramatically. That matters because electricity costs are the biggest part of the budget for operating data centers.

Andrew Feldman, chief executive of Sea Micro has said in past interviews that SeaMicro had become the fastest-growing system company in Silicon Valley history. SeaMicro’s customers include France Telecom, Skype, Rogers Wireless, Mozilla, eHarmony, and China Netcom BB. Hundreds of millions of internet users traverse SeaMicro’s hardware daily.

As we’ve described in earlier stories, Intel has been improving its server microprocessors by making them more power efficient. But the microprocessor only accounts for a third of the power consumption in a server. SeaMicro’s innovation lies in how it attacks the remaining two-thirds of the power consumption problem. It does so by combining a lot of the extraneous chips into a single, more-efficient custom chip, Feldman said.

In its earliest system, SeaMicro put 384 Intel Atom dual-core processors (for a total of 64-bit 768 cores) in a 10-rack system, which is just 17.5 inches high. The newer SM10000-64HD was a 20 percent improvement over SeaMicro’s previous server line and a 150 percent improvement on its compute density record, or the amount of computing power in a given space.

That single machine could replace rival systems with a bunch of equipment: 60 traditional servers, four rack switches, four terminal servers, and a load balancing server. It uses a quarter of the power and a sixth of the space. SeaMicro can put an entire server on a motherboard that is 5 inches by 11 inches. Since the hardware is Intel-based, customers don’t have to change their software at all.

SeaMicro was founded in 2007 and is backed with $60 million in funding by Khosla Ventures, Draper Fisher Jurvetson, Crosslink Capital, and a number of strategic investors. It also won grants from the U.S. Departement of Energy ($9.3 million) and the state of California ($250,000). SeaMicro has 80 employees. Most recently, it raised $20 million.

SeaMicro also attacked the power consumption problem with a very clever trick known as virtualization.

Today, virtualization is frequently used with servers. It is a layer of software that rests between an application and the servers that it runs on. If an application needs only two servers, the virtualization software finds two available servers to run the application. If the application gets busy and needs 10 servers, the virtualization software finds 10 available servers to do the job. The application is no longer tied to specific servers; the virtualization software frees up the overall system and gets more use out of the available servers.

SeaMicro did the same thing, but it applied the concept of virtualization to the inside of a server. Feldman designed custom chips that could take the tasks that were handled by everything beyond the Intel microprocessor and its chip set. The custom chips virtualize all of those other components so that it finds the resource when it’s needed. It essentially tricks the microprocessor into thinking that the rest of the system is there when it needs it.

SeaMicro virtualized a lot of functions that took up a lot of space inside each server in a rack. It also did the same with functions such as storage, networking, server management, and load balancing. Full told, SeaMicro eliminates 90 percent of the components from a system board. SeaMicro calls this CPU/IO virtualization. With it, SeaMicro shrinks the size of the system board from a pizza box to the size of a credit card.

By boiling down the rest of the system into a couple of chips, SeaMicro can get rid of a lot of the components in a system, thereby getting rid of space, cost, and power consumption.