AMD Teams Up With Microsoft, and Takes On Intel
By Jim Seymour
Special to TheStreet.com
04/30/2002 07:22 AM EDT
This marks the first week of Hector Ruiz's tenure as CEO of Advanced Micro Devices (AMD:NYSE - news - commentary - research - analysis). He actually took over from AMD's flamboyant longtime CEO (and still chairman) Jerry Sanders at the end of last week, and from some of the press coverage, you'd have thought this was the Second Coming.
Actually, there were few surprises and -- at least for now -- fewer changes: Ruiz was named Sanders' designated successor more than a year ago, and the transition moved rapidly.
But nearly lost in the hoopla over Ruiz's move into the CEO office was a critical gain for AMD, one that will likely have far more impact on the company's future prospects than any new CEO could bring.
The Microsoft Connection
AMD announced last week that Microsoft (MSFT:Nasdaq - news - commentary - research - analysis) had agreed to produce a tweaked version of Windows to run on PCs and servers built around the new AMD 64-bit chips, using proprietary AMD technology formerly known as the "Hammer." (The actual chips, formerly known as "Claw Hammer" and "Sledge Hammer" while in development, will come to market carrying the uglier but less aggressive name "Opteron.")
These new chips are intended to build on the success of AMD's Athlon and Duron CPU chips, introduced in 1999. Those designs have nibbled away at the bottom and middle of the PC market, hurting Intel (INTC:Nasdaq - news - commentary - research - analysis) three ways: lost revenue, erosion of Intel's reputation as the only company capable of making high-performance CPUs, and a forced fundamental change in Intel's business model.
The latter change is the most important. Intel has thrived on a model based on very high initial prices for new designs, with those prices gradually moving downward as the products age and move from just high-end PCs into the mainstream. Eventually, new designs from Intel would move the older chips to the very bottom of its price card, and then they'd disappear.
The success of the AMD Duron and, especially, its Athlon CPU, changed that forever. Now, Intel chips appear on the market at much lower introductory prices than ever before, intended to grab market share across almost the whole spectrum of PCs very quickly. Intel keeps pushing the prices down -- and its hot new chips effectively kill off the older designs far sooner than they did before.
Intel's Challenge
This is great for PC buyers and PC makers, but it's a profound and painful change for Intel and its shareholders. All thanks to AMD.
As I explained here several weeks ago, Intel now faces another kind of challenge as it attempts to move to a 64-bit-processor base, with its new Itanium design, a truly groundbreaking product. But the first iteration of the Itanium, redesigned from the ground up, drew few buyers because it required rewritten applications ... and darn few appeared. Intel is now widely believed to have a stealth effort under way to redesign the Itanium to make it compatible with existing WinTel applications, but there will be no sign of a fundamentally revised Itanium until at least next year.
So along comes AMD with its Hammer line -- 64-bit CPUs that use existing "x86" code conventions. In simple language, they give lots more performance, but they run your existing 32-bit applications. (In fairness, Itanium-based PCs and servers will, too, but only very slowly -- more slowly even than on a low-end Pentium 4 machine.) But in extending that x86 standard into the 64-bit world, AMD has to get some help on the operating-system side: Powerful extensions do no good if they're not supported by the operating system.
So last Wednesday AMD dropped the bomb: Microsoft has agreed to produce a customized version of Windows for the Hammer-tech chips.
Why would Microsoft -- half of the WinTel duopoly -- support an outsider against its partner Intel? It didn't have any choice. Microsoft is eager to push ahead into 64-bit computing because of the increased performance it delivers, and it's clearly willing to ride any horse it must to get there. It also wants to make sure Linux doesn't pre-empt the 64-bit world.
It would be a mistake to see this decision by Gates & Co. as a big blow to Intel. Intel certainly knew it was coming, probably argued half-heartedly against it ... and will, in any case, live with it, without comment. (Indeed, an Intel spokesman confirmed to me Monday that the company has no comment on the AMD-Microsoft announcement beyond saying it was no surprise to Intel.)
So, do you back up the truck and load up on AMD shares?
Maybe, but maybe not yet.
You have to keep in mind the ultimate destination of these high-performance chips: PC workstations (industry jargon for very high-end desktop PCs) and fast servers. And the PC business hasn't exactly been burning up the streets lately.
Still, more than 100 million PCs and servers were sold last year worldwide, and by even the gloomiest forecasts, this year's sales will again top 100 million units. Intel has between 75% and 80% market share, while AMD has about 15%. It wouldn't take a huge market-share move for AMD to post a big gain in revenue, pushing its stock up sharply.
I think this is a classic scale-in, buy-on-weakness opportunity. Remember that these chips aren't coming to market until the first or second quarter of next year. Buying in now is in effect a positioning exercise -- getting on board before the train leaves the station -- so you probably have time to watch for transient sags and add to a position then.
Though most of the near-term recovery in semis has so far focused on forecasts of increasing revenues at communications-chip makers, especially those strong in mixed-signal, analog/digital silicon such as Silicon Labs (SLAB:Nasdaq - news - commentary - research - analysis), Broadcom (BRCM:Nasdaq - news - commentary - research - analysis) and PMC-Sierra (PMCS:Nasdaq - news - commentary - research - analysis), I think the high-end-CPU companies are going to prosper as well.
And AMD is serious about leading that move.
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Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. |
