Processor Price War Tilts The Table, System Builders Say
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Another day, another dollar, or 50 cents.
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Heading into the last quarter of the year, Intel was making good on speculation it would launch an all-out price war with rival Advanced Micro Devices. The company was dropping prices to custom-system builders on its new Core 2 Duo processors by as much as 50 cents to $1 a day, according to channel sources, putting AMD on the defensive and making strides toward winning back market share it lost last year.
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The result: System builders and the channel were seeing opportunities to build sales volume on margins that were at least holding steady. It is a trend some expect to see continue through the end of 2006 and heading into the launch of Microsoft's next-generation Vista operating system.
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"I've been almost 90 [percent] to 95 percent AMD for the last 10 years," said Edy Bedoya, president of EBC Computers, a Salt Lake City-based system builder. "I did notice that since Core 2 Duo came out, we've already increased our Intel sales to 15 percent. My Intel portion has increased."
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To say the
market has been strained would be an understatement. Intel, Santa Clara, Calif., has been struggling for more than a year to play catch-up to AMD on performance in both desktop and
chips. And Sunnyvale, Calif.-based AMD, while it has seen growth in its market share and new alliances at the tier-one level, may have gotten caught flat-footed by underestimating Intel's ability and commitment to cutting prices.
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Two events may chronicle this better than others.
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The first event: AMD scored a victory earlier this year when it signed up Dell, Round Rock, Texas, to begin building some desktops and servers with its
64 and
processors. Dell had never before used processors from any other manufacturer besides Intel, so this was viewed as a major coup for AMD. But the other result of the AMD-Dell partnership, several financial analysts believe, is that Intel stopped paying as much as hundreds of millions of co-marketing dollars to Dell based on its previous exclusivity. Intel committed to spending additional dollars on channel companies instead. While Dell won't comment on what marketing dollars it did or didn't get from Intel, profit for its second fiscal quarter of 2007 dropped by more than 50 percent as its revenue growth slowed measurably.
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But AMD executives earlier this year said they doubted Intel would make any more of a sales investment in the channel. During its July 20 conference call with financial analysts to discuss AMD's quarterly results, Executive Vice President Henri Richard all but said expectations of Intel shifting funds and effort to the channel were wrong.
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"All our indications in the market are that this is a story or smokescreen, and that there is no fundamental change in the price structure of OEMs vs. distribution," Richard said at the time.
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The second event was Intel's launch of the Core 2 Duo processor. Not only do many system builders believe the
outperforms competing processors from AMD, but Intel has shown a particularly focused and energetic commitment to dropping its prices to the channel almost daily. Bedoya said his list price on a Core 2 Duo 6300 was $188 on Aug. 31. Within 20 days, that price dropped to $174 in almost daily increments. "Probably a dollar or 50 cents a day," Bedoya said.
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Jalil Mahini, owner of Micronet Systems, a Niles, Ill.-based solution provider, said he, too, has seen a shift in his sales toward Intel-based systems and away from AMD-based systems since the Core 2 Duo launch.
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"They are, right now, less expensive than comparable AMD CPUs," Mahini said. "The [Intel] CPU's performance is better; they've got lower power consumption. If AMD does not come out with newer CPUs to compete, they will lose market share."
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AMD, for its part, is banking on Intel disrupting the market in a way that will turn the channel away from it and toward AMD in greater numbers. Richard also said during that July conference call that he believed Intel was simply destroying some of its best-known brands—including Intel Inside and Pentium—while throwing confusion into the marketplace with talk of price cuts.
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"The partners are a little
confused. I think it is time to settle down and give them long-term guidance, and that is what we are doing," Richard said. "We do not want our partners to be worried about what they are doing [when] putting our products in the marketplace. We want to be the predictable, reliable partner. We are going to be that in the second half of the year."
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Richard was correct, at least in part, in that assessment. Bedoya, for example, said that with the rapid-fire price cutting from Intel, it makes it difficult to build an inventory. And Dell's dalliance with AMD was only just beginning as the third quarter of the year was winding down, with Dell shipping two AMD-based desktops and planning for a fourth-quarter release of Opteron-based PowerEdge servers.
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But the channel pendulum appears to have swung clearly back to Intel. And, even with price slashing and instability, it's giving system builders an opportunity go see additional growth.
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"Actually, it is good for business," Mahini said. "The [system] margins are consistently in the single digits, but the extra volume makes up for it."