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Technology Stocks : Advanced Micro Devices - Moderated (AMD) -- Ignore unavailable to you. Want to Upgrade?

To: f.simons who wrote (46611)	7/8/2001 3:26:07 PM
From: combjelly	Read Replies (7) \| Respond to of 275872

Economics and AMD. This is from "The Raging Bull" board resident economist. ragingbull.lycos.com Brief economics lesson. Pricing for Monopolists 101. There are two pricing models for the industry structure for AMD and Intel (x86 cpus). They are 1. monopolist with competitive fringe and 2. Predatory pricing. 1. Monopolist with Competitive fringe. When one producer has persistent advantages that allow it to maintain substantial market share and power, despite the efforts of would be competitors, the profit maximizing strategy is to limit output and maintain high margins, while allowing competitors to take whatever share they can. This is the model that Intel followed with K6 where they allowed AMD to gain whatever share they could based on their limited manufacturing capacity and the technical constraints of the K6 design. They did not adjust their pricing model to compete. They did focus on pushing the technology to a point where AMD could not compete at any price. They used the advantages of 1. controlling the standard, 2. having enormous capital resources and 3. technology advances ready in the wings to prevent AMD from keeping any market share gains. They priced to maximize revenues, not to maintain market share. 2. Predatory pricing is a strategic behavior that sacrifices near term profits for longer term market position. The premise is that by depriving competitors of capital, or simply building a reputation for ruthlessness that convinces potential competitors of of the futility of investing in this market, the dominant firm can eliminate competition and eventually return to charging monopoly prices without the worry of being undercut by competitors. That is the model that Intel has adopted this last year. It is, by the way, illegal for a company with Intel's market share to price this way, though the current Antitrust division probably won't do anything about it. There is a debate on the boards at the moment about whether Intel or AMD is reponsible for the price war, and whether AMD would be better off if they were less aggressive with pricing and tried to achieve higher margins at the expense of market share. The answers are Intel and NO respectively. AMD faces something pretty close to a classical competitive market. They see a market price for CPUs. If they provide similar performance parts at lower prices they sell out. If they price higher than the market they sell nothing. The picture is slightly complicated by the fact that AMD and Intel parts are not perfect substitutes, that they have different platforms and performance profiles. Since Intel represents such a large portion of the market that is not an advantage for AMD generally, although it is more appropriate to look at system costs than just CPU and for the first time AMD has an advantage over Intel on that score. The expectation is that AMD will make as many processors as they can and sell them for whatever they can get. Intel's job is to make sure that AMD can't make enough processors to hurt their revenues by pushing the envelope to places where AMD designs and manufacturing can't keep up. They screwed that up. Athlons and Durons from both Austin and Dresden are performance competitive with Intel's volume chips, and Intel has decided they will not allow AMD to have the 35% of the market that their capacity will allow- so they price low to take all the profits out. The choices in this game are : for Intel, Price War or Accomodation for AMD, live or die. AMD sees extremely elastic demand. If they are not a better deal than Intel no one buys their chips. Intel sees fairly inelastic demand in the short term. Since AMD prices under whatever level Intel chooses, they cannot gain market share through pricing. They choose whether to maintain high margins and allow AMD the same, or to have low margins and attempt to drive AMD out of business. They have chosen the latter. For those that think if only AMD had advertised they would be able to charge more and still sell out, consider this. The big boxmakers (Gateway, CPQ, HP, and Dell) all have much larger advertising budgets than AMD could consider. If the superior value of AMD based systems was such that a little advertising would greatly increase sales, any of them could have really pushed an AMD line. They didn't because by the time all the incentives were factored in AMD has not offered a much better value. Yes 1.3GHz Athlon is a much better value than 1.5 GHz P4. Intel isn't selling many P4's and most of the buyers wouldn't consider AMD if they advertised like Budweiser. There just isn't much room to argue that advertising would have grabbed a lot of sales there. PIIIs and Celerons have just been cheaper, when total system cost was compared, and the small performance advantages of Duron and Athlon don't mean that much to folks buying sub $1000 boxes, so the volume is there, but the value isn't. Athlon is starting to reach performance levels that PIII on .18 can't touch, and platform costs are now roughly the same, so PIII is in trouble, Intel needs to get much greater volumes of P4 and platform costs down , or higher performance PIIIs on .13, or AMD will have some breathing room, and ASPs will firm up until they do. One last note. I said AMD had a black or white, price lower and sell everything or sell nothing choice, so some may wonder why AMD is not selling out Durons (clearly they now have capacity for more than 7.3 million chips per qtr). The price of Duron (and Austin made Athlons) is low enough that it barely covers manufacturing and packaging and testing costs. At that point not selling is preferable to cutting prices any lower, so there is a non corner equilibrium, the lowest Intel is able or willing to go on Celeron and PIII happens to offer a value about equivalent to cost on the AMD platform with processors from Austin. If Athlon on .18 Al is as tapped out as PIII is, they will fade out together in the bargain bins. If AMD can bump the clockspeed up a notch before Intel eols PIII, they can sell out, if Intel can bump their performance on low end systems by moving to P4 or .13 Tualatin then Dresden shuts down. The longer term implications of all this are: Intel's strategy is based on the notion that depriving AMD of capital is more valuable in the long term than the profits they give up. They will stop the price war when a. Austin stops making CPUs so that AMDs capacity is more limited and so the lost profits are larger, b. it becomes clear that Intel is sacrificing long term competitive advantages to inflict short term pain (if Intel exhausts their cash and AMD does not for example) c. when AMD surrenders. I think c. is unlikely unless Intel has some big surprises in store and AMD fails to execute their roadmap. The choice of a or b depends as I said above on whether Intel can get beyond .18 PIII or AMD can get Austin processor value above .18 PIII. On that hangs 2H01 performance.

To: f.simons who wrote (46611)	7/8/2001 3:30:56 PM
From: Paul Engel	Read Replies (1) \| Respond to of 275872

Re: "If Athlon is so great, why is it marketed as an inferior product? That is where I think AMD blew it for themselves and Intel." This has been well documented. AthWiper systems - blame AMD or the Chip Set suppliers - have an EARNED REPUTATION - for poor system reliability, stability and excessive power consumption. Corporations know this - they undoubtedly evaluate AtHWiper systems - and accordingly, AMD's corporate penetration is limited to the PCs that AMDroids bring in the back door.

To: f.simons who wrote (46611)	7/8/2001 4:34:11 PM
From: andreas_wonisch	Read Replies (1) \| Respond to of 275872

Frank, good post. I believe your remark "From all that I have read on these threads for some time now, it is apparent to me that AMD had the superior product for about 18 months. What did they do with it? The answer to me is that they cheapened the best currency the company had ever had, crippled their own prospects and hurt Intel in the process" is dead-on. While I support AMD being very aggressive about getting market-share, there where so many opportunities about getting there without sacrificing ASPs, that it's really sad to see what AMD made of those. I'll never understand why AMD has to(?) sell their top-of-the-line processors for a 30% discount, without really getting anywhere, except gaining some market share in retail which will easily be lost again. Andreas

To: f.simons who wrote (46611)	7/10/2001 12:53:57 PM
From: TimF	Read Replies (1) \| Respond to of 275872

If Athlon is so great, why is it marketed as an inferior product? I don't think the Athlon was marketed as an inferior product although it might have been incompetently marketed. AMD's prices went down because they were just trying to sell what they make. With not much above 20% of the market AMD can't really set their own price. (and it appears that either Intel can't either or they can but have made the decision that defending market share is more important then maintaing ASPs) Tim

To: f.simons who wrote (46611)	7/10/2001 1:55:34 PM
From: AK2004	Read Replies (2) \| Respond to of 275872

Frank re: Did Intel get to be the gorilla by shooting for the lowest ASPs that would keep it in business? I believe so even though that was a while back I will give an example of what market share would do for amd. Let say amd sells the chip for $70 at cost where $50 fixed and $20 variable. What would happened if amd would sell 2 chips at $50/chip? Well, the cost would be 2*20+50=90 which is a profit of 10 or 5/chip. Hence asp dropped from 70 to 50 but the profit went from 0 to 10. And let's not even talk about infrastructure :-))... OTOH lets talk about it. Without market share amd would not be able to get the support of mb/chipset makers as it is getting now. Should we get into brand recognition? Obvious? ok what about cost of development of future products and how it is written off? so what you propose is that amd would take $5 from the market and go out of business. While you might desire so we have different plans for the stock.... is amd hurting intel in a process? You bet it is is it hatred of intel? Not really, it usually defined as a healthy competition. Regards -Albert