Profits were not the subject of the discussion, refer to this post:
Bill
To: +John Y. Wang (28277 )
From: +Bill Jackson Tuesday, Feb 3 1998 5:19PM EST
Reply # of 28280
John. If two companies are equal and one cuts prices, the other matches the price. They both drop sales $ by the same amount, and perhaps both increase unit sales as people respond to the lower prices. If one company has 6.5% of total marketssales and the other 92.5%(around 15:1 sales advantage for the big company) Then all things equal a price cut campaign costs the big company 15 times as muc lost dollars in sales as the small company. These are sales, not profits. Now if the smallco has set a sales price of 25% less than bigco, the bigco can cut the price to a point where the smallco loses $ on every sale bigco makes $ on every sale. I suspect this is where Intel wants AMD, so they can be prevented from ever making serious profits. AMD must stop this -25% rule, or die.
Now this has nothing to do with whether or not Intel makes a profit. They are out to kill AMD.
Take the total CPUs sold by Intel in 1997. It will be around 40-50 million CPUS. And the average sales price has been cut by around $100 +.- to Kill AMD.This is $4-5 billion dollars. 100% of this price cut would have gone to profits in Intel had kept the price higher, as it is a pure price cut, and 100% falls right to the bottom line. And what did AMD lose?, they lost an 75% of that times the CPUs they sold
which is around 3-4 million x $75 =$300,000,000. That moved AMD from a profit of around $180 million to a loss of around $120 million on the year. Intel lost $4-5 billion, and made money, and still does.
This is a text book example of how a large profitable company can attack a small badly marketed company(AMD). If AMD did not have the 25% less policy, it would have been harder to kill, as AMD would have made more profits for AMD, and Intel would need a deeper price cut to puch AMD to the loss point. AMD should have used a flexible price strategy, as their sa les were OEM, not public buyers.
AMD might go broke?, it is hard to say. How much higher would Intel stock be with an extra $4-5 in profits, and greater sales. In effect the war has been pushed down SH throats, and they have lost a lot of $$, comparatively speaking.
Do you understand the differential economics??
Bill
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