AMD Pays The Price In Awakening Intel Goliath - InformationWeek

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AMD Pays The Price In Awakening Intel Goliath

The good news in all of this is that consumers should expect the price of chips to continue to fall, which should lead to lower prices for servers and PCs.

Advanced Micro Devices is paying the price of moving from the sidelines to front and center on Intel's radar. The smaller chipmaker on Monday said revenue in the first quarter would be less than a year ago due to falling prices and slower sales.

Suffering from a two-pronged attack by Intel, including strong products and price cuts, AMD said it expected revenue in the first quarter to be $1.23 billion, $100 million less than the same period a year ago. Wall Street analysts had expected AMD to report $1.55 billion, according to the Wall Street Journal.

AMD said lower average selling prices and unit sales were responsible for the decline, which would force the company to reduce capital expenditures by $500 million, and "significantly reduce" discretionary expenses and limit hiring to key positions. There was no mention of a reduction in research and development, which means cuts in innovation were unlikely. AMD planned to provide more details April 19, when it's scheduled to release first-quarter financial results.

Through most of last year, AMD grabbed market share from Intel by selling a higher-performing server chip that took the larger rival off guard. Drawn by its better price-performance ratio, companies couldn't get enough of the Opteron, which was key to AMD soaring to eighth place in the microprocessor market last year from 15th in 2005, according to market research firm iSuppli. Intel, on the other hand, saw its market share fall to just over 12%, the lowest level since 2000.

"Intel was ignoring AMD for a long time, and they paid the price," Jim McGregor, analyst for In-Stat, told InformationWeek.

Once awakened by AMD's unexpected rise, Intel came back strong, cutting prices and closing the performance gap with Core 2 Duo chips for desktops and notebooks, and its Xeon 5100 series for servers. In addition, the company released in November quad-core chips for workstations and servers. AMD is expected to respond with its own quad-core offering in midyear.

The good news in all of this is consumers should expect the price of chips to continue to fall, which should lead to lower prices for servers and PCs. This trend is expected to be driven by the heated rivalry, as well as an expected oversupply of chips by the end of the year, when Intel is expected to have five manufacturing plants rolling out products, and AMD will have two. In addition, AMD has outsourced more manufacturing from Chartered Semiconductors.

With the economy expected to slow, it's unlikely there will be enough buyers for all those chips, McGregor said. Microsoft's new Windows operating system isn't expected to significantly boost PC sales, and emerging countries in Asia and other regions, which are expected to be prime growth areas for servers and PCs, are more likely to favor low-end chips, which could help lower the price of high-end products.

In addition, AMD's plan to integrate graphics and core processors in one chip is expected to simplify notebook motherboards, which should lower the price of the hardware, said Martin Reynolds, a Gartner analyst. The new chipsets, codenamed Fusion and scheduled to ship in 2009, are the result of AMD's $5.4 billion acquisition last year of graphics chipmaker ATI Technologies.

"For IT and the end user, it's all good news, because you're seeing a lot of competition on prices and on innovation," McGregor said. "It's all good news for us."

For low prices to continue, however, AMD will have to make a strong comeback. While analysts don't expect Intel to deliver a knockout punch, AMD will have to do "some reinventing," said Reynolds, who expects AMD to recover. "They were caught a little bit off guard by Intel. I don't think AMD expected them to be as effective as they are."

McGregor, however, was less sure saying, "There's definitely some concern."

"AMD has a daunting task in integrating ATI both from a company perspective, as well as a financial burden," he said. In addition, AMD no longer has a technical advantage.

"The next couple of years are critical for AMD," McGregor said. "They have to prove that they can take Intel head on, while Intel is looking at them."

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