AMD, Intel Set Sights on the High End

News Analysis: After a bruising first half of 2007 that saw chip prices fall, both companies are readying quad-core products for servers.

In the ongoing battle of technology and prices between Advanced Micro Devices and Intel, the winner, at least for the first of 2007, appears to have been PC buyers.

For most of the first half of 2007, Intel and AMD concentrated their efforts in the low end of the desktop and, to an extent, the notebook markets. The results helped PC sales. In reports released July 18, IDC and Gartner found that PC sales increased about 12 percent.

The PC market can expect some additional help as the two chip makers are both likely to drop prices even more throughout the remainder of the year. On July 9, AMD announced a new round of price cuts for its Athlon processors and Intel is also expected to make some cuts following the release of several new quad-core Core 2 Extreme for high-end PCs on July 16.

"The PC market hit double-digit growth and that was a good sign," said Gartner analyst Martin Reynolds. "The two companies [AMD and Intel] are beating each other up in the low-price segments of the [PC] market and that helped create some surprise growth."

Now, in the remaining six months of 2007, the two companies plan to turn their attention to the high end of the market, specifically the server market. AMD, of Sunnyvale, Calif., is preparing to release its quad-core Opteron processor, "Barcelona" in August—it should start reaching OEMs in volume in Sept.—and Intel will offer its Caneland platform for MP (multiprocessor) servers in the third quarter.

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After the release of its server product, Intel, of Santa Clara, Calif., plans to roll out the first of its Penryn family of processors manufactured on the companys new 45-nanometer process. Not to be left out, AMD is expected to release its own quad-core desktop chips later this year as well, but its unlikely that these new chips will have an impact on the market until 2008.

For AMD, the switch to the high-end market could be a welcome sign. The company reported its third straight quarterly financial loss on July 19, with a net loss of $600 million in the second quarter, compared to an $88.9 million profit during the same period last year. During a call with analysts after the numbers were released, executives said they plan to break even by years end.

A shift to the high end of the market, where the average selling price of processors is much greater, could be a boost for AMD as executives look to reverse the companys losses.

Roger Kay, an analyst with Endpoint Technologies Associates, said the high end of the market is good for companies looking for a product with a "halo" effect that will help the rest of the product line. The problem is that products like Barcelona will not sell in the volume that AMDs low-end desktop chips do, Kay said.

"Theres not enough volume there to support the whole company, and AMDs bread-and-butter products are still the low-end desktop processors," he said.

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Of the two companies, Intel remains in much better financial shape, thanks to some of the changes it started making last year at this time, including controlling its spending and cutting staff. When detailing its second-quarter results July 17, Intel reported net earnings of $1.3 billion and revenue of $8.7 billion, although its gross margins of 46.9 percent where lower than expected. The company expects the gross margins to hit 52 percent in the third quarter.

In looking at Intels forecast, Kay said that if the companys margins start hitting 50 percent or more in the next few quarters, it might mean that Intel will be back to where it was several years ago in terms of profitability.

Some analysts say that Intel wants to keep AMD focused on the low end of the market since it is in a much better position to absorb the lower average selling prices than its smaller rival.

AMD last year had strong product performance and could command a good price for its processors, but Intel has turned the tables and squeezed AMD into the low end, Reynolds said.

"Intel is trying to confine AMD to the lower part of the market," Reynolds said. "Intel doesnt have to worry as much about the lower prices, but AMD is forced to play there and theres more pressure on them."

In a research note, analysts at Technology Business Research found a similar situation between Intel and AMD.

"Intel will continue to compete at the low end," wrote to TBR. "However, we anticipate that the chip maker will be selective in the deals it enters into in these areas. As a result, AMD may be able to gain share in the lower reaches of the PC market, including both desktops and notebooks, by offering PC makers more favorable pricing than its larger rival. However, it may do so at reduced profitability."

However, analysts said that Intel is also getting ready to go head-to-head with AMD in the high end of the market—mainly servers and high-priced notebooks. With a better financial outlook and a strong product roadmap, Intel could prove a major challenge for AMD, which is making a big bet on its Barcelona and new desktop models.

"We believe that Intel is likely to be successful in gaining share in areas such as servers during the third quarter, despite the pending arrival of AMDs new quad-core Opteron processor in September and its Phenom desktop processor shortly thereafter," wrote TBR.

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