AMD: Barcelona or Bust

The new line of chips, named for the Catalan capital, may not be enough to give the troubled chipmaker the upper hand against Intel

by Arik Hesseldahl

Sure, the news from Advanced Micro Devices was bad, but it could have been worse—and better days are coming. That's how investors took to the second financial warning in as many months from AMD (AMD), which said on Apr. 9 that first-quarter sales were $1.225 billion, an 8% decline from the year-ago period, adding detail to an earlier announcement that sales would miss an initial forecast of $1.6 billion to $1.7 billion.

Additionally, AMD said it will reduce capital expenditures by $500 million this year. A person briefed on the matter says those cuts will focus mostly on operations in the U.S. and manufacturing operations at its plants in Germany.

AMD shares rose 49¢, or 3.8%, to $13.35, on speculation AMD is through the worst of its woes—namely a nasty price war with bigger rival Intel (INTC). They're pinning hopes on a new line of computer chips, code-named Barcelona, but some analysts say a looming cash crunch will make it hard for AMD to regain the upper hand that it achieved with its last server chip upgrade.

Trying to Regain Ground

After AMD eroded Intel's share of the server chip market with its Opteron line over the last two years, Intel was under substantial pressure from its investors to respond, both technologically and operationally.

Did it ever. Intel's latest round of Xeon server chips by many measures took away the technical lead that AMD had enjoyed, while aggressive pricing brought a world of hurt to AMD. "AMD is a credible competitor to Intel and has a very competitive product portfolio, and when that is the case the primary differentiating factor between the products is price," says Raymond James Financial (RJF) analyst Ashok Kumar. "When they're competing on price alone, it's an old story."

AMD will soon release a product that will help it compete on more than price. Known as Barcelona, the chip has four cores—a core being its central brain—and it's expected to give AMD a technical edge over Intel, first in servers and later on desktops and notebooks. AMD has started to advertise the chip with full-page ads in major newspapers, promoting it as beating Intel's fastest quad-core chip, using certain benchmarks. "AMD is trying first of all to offset the belief that it is woefully behind Intel right now," says Nathan Brookwood, principal analyst and founder of Insight 64, a chip industry consultancy based in Saratoga, Calif.

Coming from Behind

It's a familiar pattern in the AMD-Intel dogfight. AMD also appeared down for the count in 2005 when it released Opteron, as well as in 2000, when it released the Athlon chips for desktops. The releases in both cases gave AMD the competitive footing it needed to take the fight back to Intel, causing Intel to punch back.

AMD is also coming from behind in manufacturing technology. AMD's chip factories are still pumping out server chips on an older 90-nanometer process—referring to the size of elements on a chip—whereas Intel is essentially fully ramped to a more modern 65-nanometer process.

The smaller the elements on a chip, the easier it is to pack in more transistors and thus squeeze more speed out of a chip. AMD will produce the Barcelona chips using the 65-nanometer process. "AMD's manufacturing cycles tend to follow Intel's by about a year," Brookwood says. "So while the products that Intel is putting out in the second half of this year may be perceived as vastly ahead of AMD, the message from AMD right now is that Intel isn't that far ahead, and it's showing a few examples where it remains competitive despite the difference."