Can AMD Regain Your Trust?

AMD system builders are wrestling with two nagging issues: performance and politics. Rival Intel reclaimed the price/performance title after lagging behind AMD and won over many system builders with its Core 2 Duo and the industry's first quad-core processor.

At the same time, AMD's focus on brand-name OEMs, particularly its new partnership with channel nemesis Dell, is causing channel concern. Although AMD was raised by thousands of small system builders and VARs that nurtured the underdog to health, much of AMD's growth spurt last quarter came from large OEM sales, market researchers say.

According to Gartner Group, AMD's overall share of the market grew to 22 percent in 2006, up 4 percentage points since 2004. In that same two-year stretch, Intel lost more than 3 points, from 81.2 percent to 77.8 percent share. AMD's market share grew faster in OEMs than in the white-box market in the fourth quarter due to strong sales in the home PC market, where OEMs are traditionally strong, Gartner reported. The research firm also cited AMD's new partnerships with Lenovo and Dell as contributors to its gain.

Alarms sounded in the channel last year after Dell started shipping its first AMD-based Optiplex PC for business users. Soon thereafter, a shortage of Athlon 64 2Xs available to smaller OEMs during the busy holiday season ignited loud protest and anger in the channel—traditionally AMD's most loyal constituency. Some partners pledged to move business back to Intel.

AMD, for its part, claimed overall OEM demand put a strain on its supply and denied that its Dell relationship was responsible for the shortages. The company publicly apologized to partners and vowed to make changes internally to avoid such a deficit in the future, including appointing a new director of manufacturing, revisiting its supply chain system, adding capacity and negotiating with motherboard manufacturers.

Still, the mood at AMD's Executive Summit in Phoenix last February was bleak, according to some partners who attended the annual conference. Partners sat quietly, listening to AMD CEO Hector Ruiz reaffirm the company's strong commitment to the channel.

For some, it fell on deaf ears. "They spent a lot of time apologizing to us, but partners let AMD know we felt like we got screwed," said one partner who requested anonymity.

Paul Filion, vice president of operations at Microbytes, a system builder in Quebec, said the chip shortage is only one reason why his company shifted the bulk of its business to Intel's favor. Microbytes' business is now 70 percent Intel and 30 percent AMD. "It's the opposite of what it was last year," he said.

Another system builder who requested anonymity said AMD's price cuts and efforts to enlist more brand-name OEM business are affecting its relationship with the system builder community.

"The scar is permanent," said one system builder that has decided to switch more of its business to Intel. "The channel is getting hit on two sides: Multinationals selling below the channel's cost and taking away customers, [and] then AMD stuffed the channel and then kept lowering pricing and not extending price protection to the channel. Most channel guys can't afford to be burned even once, let alone three times in two months."

Others say AMD is on the road to maturing from a processor company to a platform vendor and is experiencing growing pains as it moves out of adolescence. Some partners—even those affected by AMD's recent gaffes—maintain that supply shortages like those Intel endured in the past are short-lived, and they expect AMD will leapfrog Intel in the price/performance category once the Barcelona chips ship.

AMD claims its quad-core processors will offer almost double the performance of Intel's current fleet of quad-core chips. "You'll see a performance swing back to AMD's favor," said Brian Corn, vice president of marketing at Source Code, a custom-system builder based in Waltham, Mass.

"The channel felt AMD turned their backs on the channel because of the supply issues, and when they made the move to Dell, there was a lot of resentment. The supply starting running out, Intel got Clovertown [quad-core processors] out, and everyone was feeling a little shaky," Corn said. "I was feeling the same way, but AMD put my feelings to rest. They admitted they messed up, and I feel a renewal of commitment toward the channel."

Analysts say the two chip makers are engaged in an aggressive price war and pointed out that market share—as well as channel loyalty—can shift rapidly in the component business. "We see this as continued leapfrogging. AMD was in the lead for quite some time, and then Intel woke up and jumped over AMD. Now, AMD has to take its turn," said John Enck, a vice president at Gartner.

Next: Earning the channel's trust