AMD Attempts To Repair Its Short Circuit

Everybody loves a good come-back story. Pitching legend Roger Clemens' expected return to the mound this month could prove one. There's Apple with the iPod. Boxer George Foreman winning the heavyweight title 20 years after he'd last held it. The VW Bug.

Chipmaker AMD is hoping for its own come-back story. The company has suffered from a recent bout of misfortune and missteps, leaving many systems builders wondering if AMD can regain the momentum it had impressively built against Intel after the launch of its game-changing Operton processors in 2003.

Today, in the face of increasing competition from Intel's new chips and price cuts, AMD has seen the market share in the x86 processor market it built in 2006 all but erode by the end of the first quarter of 2007, according to the latest figures from research firm Mercury Research.

"We just lost a game, and we're going to do everything we can to make sure we don't lose another one," says Gary Bixler, AMD's director of marketing for North America. "But the season is far from over."

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Since launching its Opteron processor in 2003, AMD had managed to chip away at Intel's market share for x86 processors, as it beat Intel to market with dual-core systems and led the price/performance curve. At the height of its growth last year, AMD was shipping 25 percent of all x86 PC processors for desktops, notebooks and servers worldwide, according to Mercury. But as Intel struck back with its Core 2 Duo processors and quad-core chips, and a raft of price cuts, AMD's share fell below 19 percent again by the end of March this year, while Intel's ballooned past 80 percent, according to Mercury. Analysts note, however, that AMD's current market share is higher than these percentages indicate, as OEMs in the first quarter were still selling excess inventory shed by AMD in the fourth quarter.

Yet there's no denying AMD's troubles of late. The chipmaker reported a $611 million loss for this year's first quarter, on the heels of a $574 million loss in the previous three months. AMD has caused some discontent in the channel too. Last year it disappointed many systems builders when it experienced supply problems after inking a long-coveted OEM deal with Dell.

"Ever since they made the deal with Dell, everything has taken a turn," says John Gouker, CEO of Workhorse PC, a McKinney, Texas-based systems builder. "I think it's been better here lately, but not a whole lot. It's kind of like gas prices. When they go from $3 to $2.50, everyone starts saying that's not so bad, but it's all relative.

"I don't know if they'll come back or not, but I think they can if they focus on what they were doing before, and not on competing on price with Intel," Gouker adds.

Distractions Aplenty

Many wonder if AMD is trying to juggle too many balls at once. In addition to the competitive pressure it faces from Intel and the challenges that resulted from its deal with Dell, the company is embroiled in a high-profile, multiyear federal antitrust lawsuit it waged against Intel in 2005 that charges Intel with monopolistic behavior in the PC market.

Some analysts are also concerned about the debt AMD has accumulated since its $5.4 billion acquisition of graphics processor and chipset maker ATI Technologies last year.

In fact, the chipmaker earlier this year raised $2.2 billion in a debt offering, $500 million of which was used to repay a portion of its term loan with Morgan Stanley for the ATI purchase. AMD is using much of the remaining portion for general corporate purposes, including working capital and capital expenditures.

And just when AMD could use a break from its larger rival, it now faces a much stronger competitor in Intel than it did four years ago.

"Intel is in a much different place than they were the last couple of years, when Pentium 4 was uncompetitive," says Dean McCarron, co-founder of Mercury. "Today they have a much stronger architecture and manufacturing capability. AMD will be coming back to a more competitive environment regardless of what they do."

NEXT: Where AMD is hoping for a boost.

Intel also recently increased its forecast for R&D spending in 2007 to $5.6 billion, which will turn up the heat on AMD as well. Last year, AMD spent $1.2 billion in R&D, compared with Intel's $5.9 billion.

While AMD brass has publicly acknowledged its disappointment with the company's performance of late, those execs maintain that the chipmaker is far from being out of the race.

One key area where AMD is hoping to get a boost this year is with the release of its Barcelona quad-core processors. That launch is slated to happen midyear for servers and in the second half of 2007 for desktops. Intel began shipping its own quad-core processors last November, and systems builders say customers are asking for those chips already.

"Intel's Clovertown [quad-core processor] has been especially helpful in the virtualization market, and we're seeing very quick multicore CPU market adoption," says James Huang, marketing manager at AMAX Information Technologies, a systems builder based in Fremont, Calif.

This is one area that's helped give Intel a leg up in the past couple of quarters.

"We're seeing a lot of excitement around quad-core servers, and I'm personally surprised by how quickly systems builders are converting from dual- to quad-core and sometimes putting both in there. It's something that's really gelling with them," says Steve Dallman, general manager of Intel's worldwide reseller organization.

But AMD is hoping to reverse Intel's lead with a new quad-core architecture it contends is superior to its rival's.

"The basics that fueled [AMD's] rise over the past two years still apply today: a strong architecture and competitive price performance, along with improved manufacturing," McCarron says. "Hopefully, Barcelona will address the architectural improvements. Price/performance is ultimately determined by AMD's own pricing and the market at large."

AMD, however, lags behind Intel someplace else as well: in the migration to a 45-nanometer manufacturing process.

Intel plans to ship its first 45-nm chips this year, saying it will have two 45-nm manufacturing fabs in production by year's end and four planned for production by mid-2008. AMD plans to start 45-nm production at its Dresden fab in the first half of next year, and start shipping product early in the second half.

Next: Making Good With the Channel

Making Good With the Channel

Meanwhile, AMD is also making efforts to restore its good faith in the channel.

"We're rededicating ourselves to making sure we don't have another slip-up in the channel," Bixler says. "Our customers need stability, consistency and predictability. We want to make sure [VARs] understand what our pricing is going to be and what our strategy is, and we're already executing on that."

But some systems builders aren't concerned with AMD's recent turmoil, maintaining that it's more of the same--the typical ebb and flow of the market.

"We're not concerned," Huang says. "We've been in the PC industry for 20 years, and there's always one company leading and another one that has to catch up."

On the whole, both AMD and Intel exited last year a little battered. For the year, Intel's revenue sunk 9 percent from 2005 to $35.4 billion, while AMD's dipped 3.4 percent over the same period. Intel's profits were down 42 percent in 2006 to $5 billion, while AMD suffered a loss of $166 million, down by 200 percent from 2005.

Both chipmakers also faced a tough first quarter in 2007, in which server, desktop and mobile processor sales declined by double-digit percentages from those of the previous quarter, according to Mercury Research. Mobile processors declined the least and were the only segment showing shipment gains over the same quarter a year ago, the research firm said.

Mobile computing, in fact, will be another battlefield for Intel and AMD, as sales of notebooks are expected to outpace sales of desktops by the end of the decade, according to vendors and analysts.

Intel, which recently started shipping its 65-nm Santa Rosa mobile chip, plans to follow that with its 45-nm Penryn in the first half of 2008.

"With the Santa Rosa launch, we'll have about a half-dozen Santa Rosa SKUs available for the channel at launch from three to four different suppliers," Dallman says. Intel is hoping to remedy the supply problems it had in the whitebook market last year.

Meanwhile, AMD has been touting its own most recent mobile platforms, which it says will appear in notebooks from major vendors later this quarter.