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AMD chips away at Intel
Chipmaker has been beating up on its larger rival in lucrative server market; will Intel hit back?
September 27, 2005: 6:22 PM EDT
By Amanda Cantrell, CNN/Money staff writer

NEW YORK (CNN/Money) - Advanced Micro Devices has been chipping away at Intel's lead in a key market and beating it to the punch with several new technological advances, but before AMD can take on the behemoth that is Intel, it'll have to do a lot more, industry analsyts said.

AMD has gotten a lot of attention for its technological advances, and market watchers say it's trouncing Intel in new technology for the corporate market, particularly chips for servers, the machines used to host corporate networks, Web sites and other information-heavy applications.

Monday AMD announced three new microprocessors in a bid to better compete with Intel, giving AMD another leg up in the server market -- a key area that is much more profitable than the market for chips for personal computers.

"The server side is not the largest part of the PC market by units, but it's very profitable," said Christopher Caso, senior vice president and analyst at Friedman, Billings, Ramsey & Co. "That is where AMD has an advantage."

AMD (Research) has gone so far as to issue a public challenge to Intel, pitting its high-end servers against Intel's in a public display to compare the two companies' wares. AMD says Intel has not responded to the challenge; Intel did not return a call for comment.

"We started this challenge because Intel has been delivering inferior technology and scrambling to keep up, but because of their marketing muscle it's not always clear they are struggling," said Henri Richard, executive vice president and chief sales and marketing officer for AMD.

"The best way for us to expose their predicament is to challenge them in the court of public opinion to show that their technology just doesn't (match up) with ours."

That's tough talk. But in a world where Intel claims 85 percent of the microprocessor market -- compared with just 9 percent for AMD, according to figures from market research firm iSuppli -- can the company that Barron's called a "plucky little upstart" ever really give Intel a run for its money?

"Intel is not going to just surrender the server market," said analyst Mona Eraiba of Rosetta Group Research. "We have seen that several times before. (AMD) starts executing, makes a lot of money and then, boom -- Intel reacts."

Serving up embarrassment

AMD gained market share over Intel when it introduced its Opteron chips that were not only more powerful but designed to consume less power. Analysts say power consumption has become a bigger issue for corporate technology managers with energy costs rising.

With Opteron, AMD began snagging big clients like Sun Microsystems (Research) and Hewlett-Packard (Research) that were seeking better-performing chips, analysts say.

"The Opteron (is) creating a lot of the momentum behind AMD. It's a powerful chip," said Rosetta's Eraiba. "It's been adopted by a lot of server suppliers and is gaining share over Intel in that marketplace."

AMD also tripped up Intel by rolling out a 64-bit processor for the corporate server market that was designed for processing larger chunks of data faster than the previous generation of 32-bit processors but did not require companies to upgrade their software, a costly and cumbersome endeavor.

When Intel introduced a 64-bit processor, it was the Itanium chip, which required users to get new software. For that reason, analysts say, Itanium tanked -- and AMD won again.

"AMD let (corporate customers) maintain that infrastructure and just gave them a little more horsepower," Friedman Billings' Caso said.

The two companies have also been in a neck-and-neck race to be first with so-called dual-core processors, which are more efficient that single-core processors. Dual-core processors essentially act as two chips in one, with each chip hosting different applications, so servers are able to handle more applications at a faster clip.

Intel was first to market with a dual processor for PCs, rolling out the Pentium Extreme in April, but AMD was first to bring dual-core chips to servers, also in April.

Intel not sitting still

Having been caught flat-footed as AMD made numerous advances in the server market, Intel obviously has to act fast, analysts said.

"AMD has Intel's attention right now, and Intel has a competitive response they have put together," said Caso, noting Intel's big overall lead in the consumer PC market extends to notebooks, a fast-growing segment. Notebooks are less profitable than servers, but more profitable than desktop computers, analysts say.

"Intel's strongest position is still in notebooks," said Caso. "They have created a strong brand, and its notebook processors are quite good."

Mark Stahlman, technology analyst at Caris & Co., has written about what he calls the "AMD effect." He thinks consumers are starting to look at quality more than price, which could also give AMD a boost in the desktop PC and notebook markets because of the technological superiority of its chips.

But analysts say that for now, AMD is focusing on corporate customers and putting a lot of its eggs in the server basket, using its current momentum in the market to try to capture more corporate customers than Intel.

But analysts say AMD has obstacles to overcome before it can truly compete with Intel, including unloading its flash memory business, a 50/50 joint venture with Fujitsu called Spansion. The business, which makes flash memory chips used in communication devices, has been a money loser for the company, and AMD and Fujitsu filed earlier this year for an initial public offering of Spansion.

Caso said most likely, AMD and Fujitsu will each retain minority ownership, which means AMD will no longer include Spansion's results on its income statements, which will boost results.

"In a vacuum, if Intel just sits still and AMD continues to execute, and if AMD does (brisk) PC business, and if it sells the flash business," then maybe AMD can truly become a strong overall competitor to Intel, said Eraiba. "But those are a lot of 'ifs.'"


Is AMD David to Intel's Goliath? Click here.

AMD's shares jump on bullish Barron's report: more here.

Friedman, Billings, Ramsey Co. does or seeks to do investment banking business with Intel and TI and makes a market in the securities of Intel. Eraiba does not own shares of Intel or AMD, and her firm does not have banking ties to the companies.

Stahlman does not cover AMD and does not own shares of AMD. Caris has no investment banking ties to the company.  Top of page

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