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[Another Face-Off

Bleeding market share and struggling to reorganize, Advanced Micro Devices is turning to an old friend (the channel) and a new opportunity (the corporate enterprise) in the hope of renewing its heated competition with chip giant Intel.

At first blush, the news doesn't look good for AMD. Over the past week, the Sunnyvale, Calif.-based company announced that it plans to cut 2,000 jobs and take a restructuring charge of up to $600 million against its profits. AMD also said it would roll out its next processor,the Athlon XP 2600,this quarter but has now passed the midpoint of November without doing so.

Meanwhile, rival Intel earlier this month shipped new Xeon processors for workstations and servers and met its time line to ship a 3GHz Pentium 4 for the desktop this year.

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AMD LOOKS TO CHANNEL PARTNERS AND HEWLETT-PACKARD TO REGAIN MARKET SHARE LOST TO INTEL

Intel President and COO Paul Otellini has repeatedly credited the company's reseller and white-box channels as a key reason for its success in meeting sales and product migration targets, including last year's industry switchover from Pentium III desktops to Pentium 4s.

"Our worldwide distribution channel's sales-out tied record unit levels," Otellini told Wall Street analysts in a conference call on Intel's third-quarter results. "We expect channel growth to continue, and we are expanding our sales, marketing and branding initiatives in this channel."

Both AMD and Intel are continuing their decades-old battle under a new generation of leaders. Hector Ruiz assumed the president and CEO position at AMD in late April from company co-founder and chairman Jerry Sanders. Otellini, who reports to Intel CEO Craig Barrett, was named president and COO in January after heading the Intel Architecture Group.

Against that backdrop, AMD's Ruiz has begun making a series of public appearances and interviews to spark some momentum for his company. AMD's third-quarter processor market share fell to 11.5 percent from 15.6 percent in the second quarter and 20 percent in third-quarter 2001, according to Mercury Research. Intel, on the other hand, saw its market share climb to 86.8 percent in the third quarter from the 82.8 percent in the second quarter and 79.2 percent in third-quarter 2001.

Ruiz attributed AMD's market-share losses to its decision to "bleed" old inventory out of the channel after the second quarter of 2002. The delays in shipping the Athlon 2600 and Hammer desktop processors weren't severe, he said.

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'We expect channel growth to continue, and we are expanding our sales, marketing and branding initiatives [FOR solution providers.' -- Paul Otellini, INTEL

And considering the "monopoly" position that Intel has maintained, AMD is doing a relatively good job of keeping up, Ruiz said. Still, AMD aims to do more than just keep pace. Over the summer, Hewlett-Packard agreed to begin building business desktops using AMD processors. The first major deal arising from that alliance came last week, when Northeast Utilities, a Fortune 500 company, said it would roll out Compaq-branded desktops running on AMD processors. Ruiz called the deal a victory for AMD and the beginning of what the company hopes is the first in a series of key large-account wins.

"Our win with HP was very important and a milestone in our plan to go beyond just being used in the consumer space," Ruiz said in an interview. He also called AMD's entry into the corporate space "a very important milestone for the industry," stressing,as AMD often does,the need for competition.

Intel, for its part, seems to be trying hard not to gloat over its recent successes. Though the company has shipped the 3GHz Pentium 4 and Xeon processors with Hyper-Threading technology and holds a nearly two-year lead in the 64-bit processor arena, company executives said they know the market can turn quickly.

"We are putting forward significant investments in the channel," said Thomas Kilroy, Intel's director of worldwide channels. "We're scaling out the 'Intel Inside' program. We're going to continue to expand our training programs."

Intel Inside remains a linchpin of Intel's channel strategy, company executives said. The company has been increasing marketing funding for white-box makers that buy targeted amounts of Intel products through authorized channels, and earlier this year it expanded the program to allow solution providers to use those funds for a broader array of promotions that go beyond traditional print and broadcast advertising.

Many channel executives say the Intel Inside marketing program has provided solution providers with a carrot to obtain Intel products through distributors, which in turn have promoted the Intel brand. And according to recent CRN Channel Satisfaction Surveys, solution providers have become happier with Intel and less so with AMD.

In May, 51 percent of solution providers polled by CRN said they were satisfied with Intel's channel efforts, and 11 percent said they were dissatisfied. At the same time, 58 percent said they were satisfied with AMD, and 12 percent said they were dissatisfied. Yet those numbers have almost reversed. In October, 58 percent of solution providers said they were satisfied with Intel, and 7 percent were dissatisfied. AMD's satisfaction rating, meanwhile, dropped to 47 percent, with 8 percent saying they were dissatisfied.

Still, a key behind-the-scenes issue,the growing friction between Intel and the post-Compaq-merger HP,appears to be playing out, and AMD stands to be the beneficiary. Besides tapping AMD to provide commercial desktops, HP has chosen another Intel rival, Transmeta, to provide processors for its new Tablet PCs. And in recent weeks, HP employees have said that Intel has been using its channel standing to gain an edge in deal making.

According to one HP employee, the company had a study under way last month intended to verify Intel's claim that the white-box channel accounted for about one-third of its North American sales. The employee said Intel was using the strength of the white-box market as a bargaining chip in price discussions with HP.

In an interview earlier this month, Intel's Otellini walked a fine political line when asked if there was any friction between HP and Intel, as evidenced by HP's alliances with AMD and Transmeta. He acknowledged HP's importance to Intel's business, noting that HP is Intel's second-largest customer, but called HP's recent decision to give business to Intel rivals disappointing.

"My reaction is, 'Let's go win it back,' " Otellini said.

Two other issues also could alienate Intel partners: Dell's entry into the white-box space and the re-emergence of the gray market, which competes with authorized Intel distributors.

After Intel began touting Dell's Solution Provider Direct white-box program, one executive at a large Intel-only systems builder voiced frustration. "It may be time for me to take a look at AMD," he said.

The solution provider, who requested anonymity, said he was particularly disturbed to discover recently that Intel provided a link on its Web site to PriceGrabber.com, which listed some Intel products at below the cost of acquisition from authorized channels. Intel executives have said that much of the gray market activity can be traced to offshore brokers pumping in excess overseas inventory.

What's more, HP isn't the only computer manufacturer moving AMD processors into the enterprise. Systemax, a Port Washington, N.Y.-based white-box maker and holding company for several solution providers, has begun building commercial desktops using AMD Athlon processors. With annual revenue of more than $1 billion, Systemax could help AMD stake a claim in territory in which Intel has dominated.

Ruiz said he believes the channel will continue to regard AMD positively for various reasons, including customer choice, pricing and performance. Nevertheless, some solution providers consider market-leader Intel more of a sure thing.

"Our revenue has doubled over the last three quarters. We're 100 percent Intel," said Charles Liang, CEO of Super Micro Computer, a $250 million systems builder based in San Jose, Calif.

Liang pointed to Intel's Xeon line as a business driver. He also lauded Intel for delivering Hyper-Threading technology to the Xeon platform,an advancement that he said speeds performance in some server applications by 20 percent to 30 percent.

Other solution providers, though, remain concerned about the inception of Dell white boxes, which contain Intel processors. Intel has publicly supported the direct PC vendor's foray into unbranded systems, announced in August.

"That is a big market, and Dell is going after market share," Kilroy said. "My guess is Dell wouldn't go after it for [just 1 percent."

Ruiz had a blunt assessment of Dell's white-box play: "It's a joke," he said, explaining that it takes more than a low-cost PC to offer the value that traditional white-box makers have provided to customers. "The white-box market is very important to AMD," Ruiz added.

AMD expects much of its reorganization to be complete just as it readies shipment of its next-generation 64-bit processors. Plans call for the Athlon 64 processor, formerly dubbed Clawhammer, to ship by late in the first quarter or early in the second quarter of 2003. The Sledgehammer chip, which will be branded Opteron, is slated to launch in the first half of next year.

While AMD will be getting to the 64-bit dance much later than Intel, Ruiz said he believes that the market wants his company's platform. Athlon 64 and Opteron have been engineered to permit backward compatibility with 32-bit applications,a capability that Intel doesn't think the market is seeking.

"They're pulling your leg," said one Intel marketing executive in response to AMD's predictions.

But no matter what either company says, the future of the 64-bit space remains cloudy. Few solution providers say they have any plans to sell Itanium-based solutions in the next year, and even fewer say they have such plans for AMD's Hammer.

But AMD's Sanders said the power of his company's effort may be underestimated. "Hammer technology is going to change the world," Sanders boasted last week at Comdex upon his induction into the CRN Industry Hall of Fame.

Pounding home the theme of choice and competition that AMD provides in the Intel-dominated processor market, Sanders also posed a rhetorical question: "Can you imagine a future with just Itanium?"

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