SAN FRANCISCO (CNN/Money) -
The semiconductor space has been hot in the last couple of weeks.
We had the Computex conference in Taipei, Taiwan, last week (rescheduled from a SARS-postponed date in April); Intel's new marketing-campaign launch; and the pricing of a huge IPO for AMIS Holdings (AMI Semiconductor's parent company). Rounding out the news last week was Advanced Micro Devices's (AMD: Research, Estimates) debut of the Athlon 64 -- its first-ever 64-bit processor.
I mention it last, but its significance is highest: AMD's debut is arguably the biggest processor development in roughly 10 years, when the industry first moved from 16- to 32-bit architecture.
And before several hundred e-mails flood my inbox, I'll acknowledge that yes, Apple's (AAPL: Research, Estimates) PowerPC machine already boasts 64-bit technology, making it the first desktop machine to reach that milestone.
But for the mass market, AMD's new processor is the first glimpse of what will inevitably be the next wave of processor power. Therein, however, lies a key bit of irony in AMD's announcement.
Though it is targeted at the mass market of Windows-based PCs, there's not much of a mass-market need for the kind of power the Athlon 64 offers. Right now, you only need that kind of processor oomph if you're a hard-core gamer or someone who makes movies on your PC.
"Athlon 64 is a revolutionary technology," says John Morris, a senior brand manager for AMD. "And Tuesday we began the evolution. It will take time to make 64-bit computing pervasive."
Unlike some other companies, however, AMD can't afford to wait long for the product to catch on. The company's profit margins are under serious pressure, with its gross margins declining from 46 percent in 2000 to 22 percent in 2002.
And in an attempt to seed the market with its 64-bit product, AMD is not charging much of a premium for the Athlon 64, which is backward-compatible to 32 bits. In essence, it's offering consumers the chance to future-proof their PCs -- a tack not often taken by computer companies -- on the cheap.
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"If you wanted to buy a machine that would still be a viable box in five years, this has that argument," says Rob Enderle, principal analyst with the Enderle Group.
It's a bold approach, and AMD will need to make up those margins with volume sales if it's to succeed here. In some ways, however, its longevity angle is at odds with the box manufacturers it must rely on to buy Athlon 64s in bulk. They don't want consumers to hold on to their machines for five years; they want a much shorter life cycle.
So far, the only mass-market manufacturers to sign on in support of the Athlon 64 are Hewlett-Packard and Fujitsu.
AMD takes the pole position in the processor race
AMD's launch places Intel in the unfamiliar position of following another company's technology lead to market. AMD's launch caught Intel "flat-footed," Enderle says. "Intel doesn't have a good 64-bit transition strategy."
Another rude awakening for Intel will occur when Microsoft ships its 64-bit version of Windows XP, due next year. According to Enderle, Microsoft will build its operating system around AMD's chip -- not Intel's -- and Intel will have to adjust accordingly.
Wall Street has reacted positively to AMD taking the pole position in the processor race, driving the stock up to a 52-week high last week and doubling its price since August.
However, investors shouldn't expect high-volume sales for the Athlon 64 out of the gate: The market still needs to figure out the value proposition, and bleeding-edge users need their hosannas heard. But if history is any guide, it's only a matter of time before the entire industry moves to 64-bit processors.
"When we made the move from 16 to 32 bits, we were asking why we needed to make the move," Enderle says. "But by mid-decade no one doubted it. We always go through this cycle."
One thing's for certain: This is a huge move for AMD, perhaps the boldest it has ever made. In many ways, the company is betting its future on this product. If the market reacts positively, AMD can grab a good amount of market share from Intel in a relatively short time.
"This is the single most important thing that AMD has ever done," says AMD's Morris.
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