AMD Looks to Game Consoles To Help Fuel Future Growth
The work AMD does with the gaming consoles also will help it hone its technology in other gaming areas, including PCs, Read said. The hope for AMD is that such expertise will attract more game developers to the AMD ecosystem and help the vendor take share away from Nvidia, whose discrete graphics technology dominates the PC gaming space. "Our strategy to make AMD the de facto standard for game developers continues to gain momentum as we launch the industry's fastest desktop and mobile graphics chips and cement our position as the technology provider of choice for all three next-generation game consoles," Read said. Su agreed. "We definitely believe there is a great synergy between the game console and the overall PC gaming market," she said. "I think gaming is one of the key pillars of AMD in our graphics and APU [accelerated processing unit] strategy. So, having the game consoles on the same graphics architecture does allow synergies in the software development and the work that we do with ISVs, and we are pursuing that quite aggressively."However, he and Devinder Kumar, senior vice president and CFO, both said the business model for game consoles is different than what AMD is used to. The costs are up-front and funded between AMD and the customer, and the gross margins are lower, but there is a big upside, Kumar said. "The semicustom model has the potential of providing a long-term revenue stream based on high volumes, which results in gross margin that is lower than the corporate average but has significant revenue and earning power as volumes ramp," Kumar said. "Under this model, the majority of gross margin dollars fall due to operating income, and the operating margin for this business will be in the low double-digit range, [which] more than offsets the impact of the lower gross margin. In addition as we transition the shipping silicon products, game console royalty revenue included in the semi-custom business is expected to decrease moving forward, although the decline will be more than offset by our growing semi-custom development and product revenues."
Not everyone sees gaming consoles as being AMD's savior. Some analysts have questioned whether AMD can leverage the work with consoles into a larger share of the overall gaming market, and also point to the low margins on the devices. Read noted during the call that the company lowered projected gross margins for the third quarter from between 39 percent and 40 percent to 36 percent because of the consoles.