There's long been some conventional wisdom on Wall Street when it comes to chipmaker Advanced Micro Devices: In the long run, the smart money is on Intel -- not necessarily because of the quality of Intel's chips, but rather its size. Intel could always cut prices and take business away from AMD, the thinking went. And for many years, that was often the way things were.
But these days, AMD is eating away at Intel's lead in key markets, it's in hot pursuit of some of Intel's biggest customers, and it's stepping up legal pressure on its larger rival. Views on AMD (AMD) and Intel (INTC), they're a-changing.
Take the Mar. 1 rating cut on Intel by JPMorgan semiconductors analyst Chris Danely. Intel is not having the kind of quarter it initially expected, in part, Danely says, because AMD is gaining share. Danely cut his earnings estimate on Intel to $1.03 per share from $1.23 for the 2006 calendar year. AMD's share of the combined server, desktop, and notebook market amounted to 21.4% in the fourth quarter, says Cave Creek (Ariz.)-based research firm Mercury Research. That was up from 17.7% in the third quarter.
SERVER SWITCH? News like that has AMD Chief Executive Hector Ruiz grinning like a guy who enjoys telling you he told you so. In years past, "when [Intel] did well, we did well, and it was hard for AMD to differentiate itself," Ruiz says (see BW Online, 3/2/06, "A Chipmaker's Confidence"). "But things have changed. We're doing well, executing well, our customers are happy with our products and our road maps. But that's not the case with our competitor. For the first time in the history of the company, we're out of sync, and we intend to keep it that way."
Part of Intel's problem, says Danely, is Dell (DELL). Growth at the PC colossus is expected to slow this year. In a research note, Danely described Intel's troubles as being "exacerbated by both Intel and its largest customer, Dell, losing market share." Intel could end up with 83 days worth of unsold inventory in the first quarter, from 73 days in the fourth quarter, Danely predicted. That compares with a normal range of 65 to 70 days.
Some Dell customers, particularly those who buy its servers, want the PC maker to start using AMD chips, analysts say. "Dell has customers who are so disenchanted with the road map for Intel's Xeon server processors, and the gyrations that are taking place with that product line, that they just want to give Intel a time-out and source their equipment based on AMD technology," says Nathan Brookwood, head of Insight64, a chip industry consultancy based in Saratoga, Calif. "Some of these people have been Dell customers in the past, and I understand that Dell has been told in no uncertain terms by many of them that if Dell doesn't have AMD Opteron chips in its server lines, then they won't buy from Dell."
CHINA GROWTH. Dell has reopened negotiations with AMD, a well-placed source has told BusinessWeek (see BW Online, 2/23/06, "It's Dell vs. the Dell Way"). Ruiz says the two are indeed talking, although no more than at any other time in the past.
"We have for years had discussions with Dell, and we have a good relationship with them," he says. "They have a pretty damn good idea where we are and where we are going, because they can play with our products. We've always made our plans with the assumption that Dell won't sign up. We make our plans to accomplish what we need to accomplish. But if they were to change their minds, we do have the capacity and the capability to meet their needs."
Ruiz agrees that if Dell were to become an AMD customer, it would most likely involve an AMD chip going into a Dell server. "I know that the place where customers are insisting on AMD is in the server space," he says. "More than in any other segment, this where the performance and the value proposition is so overwhelmingly in our favor that end users are demanding it."
More recently, AMD has renewed and expanded its relationship with China's Lenovo (LNVGY), the fast-growing Chinese PC maker, which last year bought IBM's (IBM) notebook-PC unit (see BW Online, 2/23/06, "Lenovo Makes a Name for Itself"). "There is a company that in a very short time we [have] grown significantly with," Ruiz says. "And a lot of it has been from the success in China. We went from almost nothing in China to being a fairly major player with Lenovo in China. They would like to replicate that experience with us on a global basis."
FIGHTING WORDS. Meantime, AMD is digging in for a nasty antitrust fight with Intel. AMD said on Mar. 1 that its lawyers have subpoenaed executives of the Internet calling service Skype, now a unit of eBay (EBAY). AMD wants the lowdown on a deal between Skype and Intel that involves a feature on the new Skype 2.0 service available only to customers whose computers contain Intel chips.
Ruiz finds Intel's deal with Skype legally troubling. "We're trying to answer one question and one question only," he says. "Is this an instance where Intel has abused its monopoly position? If you're a consumer sitting at home, and you just bought a computer that you're real happy with, and now you find you cannot use this feature because someone has done a deal that locks you out -- I think that is not fair to the consumer."
Intel has repeatedly denied AMD's allegations, and described its behavior in the marketplace as perfectly legal, if aggressive. "Skype is one of 50 companies [that] have been subpoenaed so far in this antitrust matter," says Intel spokesman Chuck Mulloy. "At the end of the day, this case will be litigated in court, and we hope that people will understand that our business practices are fair and lawful."
MARKETING PUSH. One interesting issue that will certainly raise eyebrows as the legal process proceeds: If Intel's business practices have been so harmful to AMD, why is the latter doing so well right now? Ruiz says the company still gets calls from customers worried that Intel might retaliate if they put AMD chips in some lines of their computers. "The behavior described in our complaint and verified by Japan's Fair Trade Commission still continues today," he says. "Even with our current momentum, our growth is capped by illegal, exclusionary conduct in certain areas."
Intel won't cede ground without a fight. It's splashing out $2.5 billion on marketing and advertising as part of a major push far beyond PCs -- into consumer electronics, wireless communication, and health care (see BW, 1/09/06, "Inside Intel").
AMD has fought long and hard to change the conventional thinking, and at least for now, Ruiz & Co. are showing no sign of retreat.
Hesseldahl is a writer for BusinessWeek Online in New York
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