Intel eats away at AMD’s share of chips

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What a difference a year makes. On Thursday Intel will deliver an upbeat report on its new products and sound finances at its analyst day in New York, while its rival Advanced Micro Devices faces the wrath of investors at its annual stockholders meeting in Silicon Valley.

The positions of the two chipmakers that dominate the market for PC microprocessors have completely reversed.

Twelve months ago, Intel was announcing a drastic review of its operations after its profits had fallen by a third and its share price by more than 20 per cent over the year, making it the worst performer on the Dow Jones Industrial Average.

It told analysts that customers were reporting that several million of its processors had piled up in inventories as demand slumped.

At the same time, AMD was reporting record gross margins for the first quarter of 58.5 per cent and a share of 27 per cent of the market for server processors. AMD’s shares had peaked at $42 during the quarter.

Since then they have lost two-thirds of their value as AMD has issued a series of warnings this year.

Its gross margins almost halved to 31 per cent in the first quarter as it swung to a $611m loss, while its overall market share slipped to 19 per cent.

The reversal of fortunes is a tale of how a much smaller chipmaker was able to outwit a manufacturing titan, before the bigger player rediscovered its poise and engineering prowess.

“I think that most of AMD’s successes over the past three or four years came against a very weakened competitor,” says Steve Kleynhans, analyst with the Gartner research firm.

“Intel had a problem with its product family and the unfortunate thing about the semiconductor business is that it takes a long time to dig yourself out of a hole when you get into it,” he says.

Intel’s hole was its Netburst chip architecture, which was built for speed but ran too hot and led to its microprocessors being outperformed by AMD’s, particularly in the server segment, where its rival made rapid market-share gains.

Intel began to put things right last June with its first new architecture for five years and the launch of energy-efficient chips with two cores or “brains.”

It also moved to the next level of miniaturisation ahead of AMD, making chips with circuit widths of 65 billionths of a metre, down from 90 nanometres.

The new chips were more than 30 per cent smaller than the previous 90nm, producing cost savings.

Combined with the need to clear out old inventory to make way for its new products, Intel was able to launch a price war against AMD that would cut into both companies’ margins but would hurt AMD more and result in Intel winning back market share.

Traditionally, Intel has supplied the processors for more than four out of five computers using the dominant “x86” architecture and, in the first quarter, its share was restored to 81 per cent, up from 74 per cent in the fourth.

It has also released processors with four cores more than six months ahead of those planned by AMD and is set to have a year’s lead over its rival in beginning production of 45nm chips in the fourth quarter.

Meanwhile, AMD has been sidetracked by its acquisition of the Canadian graphics chipmaker ATI for $5.4bn in October.

ATI makes lower-margin products and has seen its chief competitor Nvidia come out with more technically advanced products in recent months.

But analysts feel the acquisition was a move AMD had to make to try to out-manoeuvre its bigger rival. “The timing was unfortunate, it’s going to make the next year or two kind of rough for AMD, but I think in the long run it’s a good move,” says Mr Kleynhans.

Rob Enderle, technology analyst with the Enderle group, says that buying ATI was an excellent move from a strategic standpoint. “It caught Intel napping and it moves the argument into an area where Intel is historically weak – its graphics capabilities have improved so little over time.”

AMD will launch a new series of processors codenamed Barcelona this summer that may give it some breathing space, but the real fruits of its merger with ATI are not expected until 2008-2009 when Fusion, a microprocessor combined with the latest graphics processing unit (GPU) is launched.

Mr Enderle says that, as long as Intel defines the market, AMD will have fewer resources and will be unable to break out of the range of less than 20 per cent market share, well below its target of 30 per cent.

“It’s only when AMD can change the battlefield and the weapons that it can move against Intel. That’s what it’s trying to do with Fusion – beating Intel to market with that can give it a leadership position again.”

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