Some System Builders Bruised Amid Chip Makers' Price Wars

As its processor price war with Intel heats up, AMD has been offering more frequent short-term price breaks through distribution without warning, according to three U.S. channel sources familiar with AMD's pricing moves. The result for some system builders has been inventory of higher-priced products and no price protection, the sources said.

Several system builders said AMD is slated for another round of scheduled price cuts July 23, just before Intel's planned launch of its next desktop processor, Core 2 Duo. But it's the price reductions in between the scheduled cuts that have roused their ire.

One system builder, who asked to remain anonymous, said the unscheduled price drops have left him holding a significant position with the higher-priced inventory. The unscheduled cuts also have made it difficult to effectively price custom systems for customers and, in some cases, have extended the sales cycle, he said.

For example, the system builder said he recently advised at least one customer to wait until AMD's next scheduled price cut to buy products because he couldn't guarantee the consistency of prices until that time. He was concerned that he would buy processors for the large order and AMD would pass discounts through distribution while his firm is still assembling the systems.

Several system builders said some corporate customers are savvy enough to know when component makers cut prices, and they often demand that the savings be passed through to them.

David Stinner, president of US itek Group, a system builder and managed services provider in Buffalo, N.Y., said a schedule of changes helps system builders manage inventory and system pricing effectively. Though he declined to speak about AMD's pricing policies specifically, he offered this observation: "AMD hasn't stayed true to the channel by keeping a consistent schedule of price cuts."

AMD countered that its price moves aren't out of the ordinary. David Schwarzbach, divisional marketing manager of AMD's desktop division, said the Sunnyvale, Calif.-based chip maker regularly offers two types of price changes: scheduled and market-specific adjustments. The scheduled price cuts are always communicated across the channel, while the market-specific adjustments--a temporary price reduction based on market conditions--are done with some short notice.

Market-specific adjustments are short-term promotions to deal with short-term market conditions, according to Schwarzbach. "They will always be limited in duration, model number and geography," he said.

In a statement sent to CRN, AMD said it will maintain its superior value proposition. "Our continued success in growing AMD-based desktop PC platforms will reflect this. Additionally, we have had a scheduled price move for Q3 and we communicated this strategy to the market months ago. We expect to be price competitive with our competitor. "Our competitor made multiple price moves throughout the second quarter that we believe negatively impacted channel resellers. These unexpected and frequent price moves by our competitor created a higher than normal slowdown in channel reseller expectations. To continue AMD's success in the market, we made market specific price adjustments."AMD and Intel have been wrestling for market share over the past several years, and AMD has been gaining ground in the United States. But in recent months, the skirmish has intensified.

Many system builders said AMD's processor technology, with its integrated memory controller, has gained mind share with corporate buyers and enthusiasts over the last few years. But this year, Intel vowed to take back territory and has pushed up ship dates, slashed prices and offered rebates for the channel.

Last month, Intel shipped the Xeon 5100 "Woodcrest" processor ahead of schedule at prices starting at about $209.

Santa Clara, Calif.-based Intel is slated to release its next-generation desktop processor--the Core 2 Duo, code-named Conroe--and its vPro platform on July 27. System builders said AMD's next scheduled cut comes just shy of Intel's launch date, but they didn't have details about how deep the cuts would be.

AMD has already released its new AM2 desktop processors. Channel sources said AMD plans to release its next server chip this quarter.

Though some system builders have been struggling with the flurry of price moves, many view the stringent competition as a win for the channel. Intel and AMD, for example, are now forced to innovate faster while staying price competitive, resulting in more powerful chips at lower prices.

In fact, some system builders and even one source inside Intel said they were surprised that Intel chose to be so aggressive with its Xeon and upcoming Core 2 Duo pricing--two processors that by most accounts perform extremely well.

For example, one channel source said a 1.8GHz CPU with 2 Mbytes of cache and a 1,066MHz front-side bus will be priced in the $200 range. Another source familiar with Intel pricing plans said pricing on the older Pentium D dual-core chips will be slashed, coming in at about $80 for some SKUs.