The IT direction that Canadian insurer Medavie Blue Cross has set for itself illustrates one of the reasons why Sun Microsystems announced last week that it has agreed to once again sell servers based on Intel chips.

When Medavie started running Web applications in 2000, Sun’s UltraSparc-based systems dominated that market, and software vendors were designing applications specifically for Sun’s Solaris operating system, said Don McPhee, director of technical services at the insurer.

But he added that as lower-cost x86 servers have become increasingly capable, Medavie has been moving to “more commodity-based” systems running Linux and using processors from either Intel or AMD. “Things have changed,” McPhee said. “We just went with the momentum.”

Now Sun is changing. Two years after the company dropped several low-end servers based on Intel chips and decided to rely solely on AMD for x86 devices, Sun said it will develop a full of line of servers and workstations with Intel’s Xeon processors. Sun plans to start shipping Intel-based systems by June, and the two vendors will work together to optimise Solaris for hardware built around Intel’s x86 chips.

Sun CEO Jonathan Schwartz said during a teleconference that about 70 per cent of Solaris x86 users are running the operating system on Intel-based hardware. But Sun expects the new combination of Xeon and its OpenSolaris open-source software to attract more interest from independent software vendors.

In addition, Sun officials acknowledged that UltraSparc-based systems have become too expensive for many users looking to run Web applications. “The customers who left us post-bubble didn’t want to leave us,” said Scott McNealy, Sun’s chairman. But, he added, customers no longer could afford the cost of the company’s systems when “the Xeon thread was so much cheaper.”

Until recently, though, Intel was having trouble developing Xeon chips that matched the performance of AMD’s Opteron processor. Since July, Intel has added two higher-performance and more power-efficient chips: the dual-core 5100, code-named Woodcrest, and the quad-core 5300, code-named Clovertown.

Stephen Josselyn, an analyst at research firm IDC, said Sun has been fighting the same battle against x86 hardware in the low-end server market that other Unix vendors with RISC-based processors have been.

A return to Intel chips should help Sun sell Solaris servers to a broader market and enable it to offer more options to data centre managers who are turning to x86 technology, said Nathaniel Martinez, another IDC analyst.

Sun will continue to offer Opteron-based systems as well, and an AMD spokesman said Intel’s backing of Solaris “is good for all of us.” He added that everything he has heard about the Sun-Intel deal indicates that it will be complementary to Sun’s existing business relationship with AMD.

Ben Ames and Robert McMillan of the IDG News Service contributed to this story.