High-definition benefits of AMD deal are clear

Analysts may have difficulty processing the financial logic. But the changing digital landscape, in which smooth high-definition images are becoming as important as fast-opening software applications, means AMD’s takeover of ATI appears to make complete technological sense.

For some time, there has been an intellectual debate in the industry on whether the graphics processing unit (GPU) is achieving primacy over the central processing unit (CPU).

With graphics cards made by the dominant players Nvidia and ATI coming loaded with 256Mb of memory and capable of floating-point calculations 10 to 15 times faster than AMD and Intel CPU microprocessors, there is no doubting their superior power at delivering images to a computer or TV screen.

But the CPU, as its name suggests, is still central to the basic workings of electronic devices and AMD on Monday made it clear the two would continue to co-exist doing their separate tasks, although it envisages one day combining them on a single chip.

In the meantime, it will be mixing them in different strengths and combinations, and with other chipsets, to serve different markets.

There will be general purpose, data centric, graphics centric and media centric products for business and consumer PCs, mobile users and living-room consumer electronics devices.

ATI is supplying graphics chips for Microsoft’s Xbox 360 and the Nintendo Wii games consoles, as well as for digital television.

Microsoft’s new Vista operating system requires much more powerful graphics to run its visually sophisticated interface, and handheld devices need more graphics muscle to handle 3D gaming and TV pictures.

All these areas represent exciting opportunities for the new company, but its initial targets will be more prosaic.

AMD has more than a 25 per cent share of the market for microprocessors in consumer desktop PCs and enterprise servers in its battle with Intel. It has less than 15 per cent of the market for notebook PCs and enterprise desktops.

It says these latter markets are worth $16.7bn and represent major growth opportunities.

Intel has excelled in offering business computer makers such as Dell an integrated set of its own chips – it is the largest maker of integrated graphics chips – that have enabled it to outpace AMD, which has gathered accompanying chips from an assortment of manufacturers.

“This deal enhances our time-to-market capability in those product categories that require a lot of platform-level work,” Dirk Meyer, AMD president, told the Financial Times on Monday.

“We can ensure the platform’s stability, and that’s hard to do in the enterprise.”

Rob Enderle, analyst with the Enderle group, said in a blog note on Monday that becoming a “me too” vendor in those areas would not allow them to take much share from Intel. “They have to be better and one of the areas where Intel has been weak is in PC graphics. Both ATI and Nvidia have better graphics solutions than Intel and, by acquiring ATI, AMD gets to step ahead of Intel on system performance.”

The competition was moving from a parts level to a platform level, he noted, and AMD’s Silicon Valley neighbour, Nvidia, was being left as the odd man out.

AMD has relied more on Nvidia than ATI for accompanying chips in recent years, but Mr Meyer said it decided to buy ATI because it was a better cultural fit and had leadership in mobile and consumer electronics areas.

It is also cheaper to buy than Nvidia, but AMD is still saddling itself with some serious debt.

Standard & Poor’s Rating Services placed AMD’s B+ rating on Creditwatch with negative implications on Monday.

Separately, an S&P chip analyst downgraded AMD from Strong Buy to Hold, noting the deal’s execution risk and debt burden.