Tuesday, May 19, 2009

AMD: The Dream Renewed

Lately there has been an uptick in the price of AMD stock following news that the European Union will fine rival Intel some $1.44 billion for illegal anti-competitive practices earlier this decade. This lends credence to the AMD v. Intel lawsuit in the U.S., which could result in billions of dollars of damages being awarded to AMD. AMD's market capitalization even after the recent run up stands at less than $3 billion, largely because it has been years now since it has shown a profit.

We probably are not at a the start of a new era, for reasons I will give shortly, but consider the possibility that AMD is going to emerge as a financially strong competitor to Intel in 2010. Intel would have to be prevented from using its substantial cash reserves to force AMD into another price war that would keep AMD from making significant profits. AMD would then be free to continue to introduce superior technology as it did earlier in this decade, only going forward it would be competing in a free market where computer manufacturers could incorporate AMD products into their designs without being threatened by Intel.

What happened earlier in the decade with AMD's technological innovations is instructive. AMD, which had mainly made Intel CPU clones until 2000, made three major design changes that rocked the computer world.

First, Intel had decided that the switch from 32 bit to 64 bit computing would be made by segmenting those two markets. If you wanted to do 64 bit computing the Intel way, you would have to switch to Itanium processors, and your old software would not work on those new processors. At the low end you would stay on the 32 bit road map. Intel ignored feedback from its customers that they wanted chips to run 64 bits on the old 32 bit instruction set, making them capable of easily running older software, and allowing for software makers to easily design 64 bit software. AMD listened to customers and introduced chips that could run both 64 bit and 32 bit software. A lot of people liked that.

Second, AMD introduced HyperTransport, which fixed a major bottleneck in Intel chips that prevented data from being moved from the CPU to memory, other CPUs, or other devices. Only this year, in 2009, did Intel introduce a similar feature in its processors.

Third, AMD's design took into account the problem of energy consumption and overheating of chips. Intel's plan was to make chips run ever faster, with no major changes in architecture, but fast meant hot. AMD changed the architecture to get just as much performance from its chips, but using less energy and running cooler.

The Opteron chip for servers incorporated all of these features, and for a couple of years steadily gained market share. Of course, AMD had almost no server market share before Opeteron. The same features were introduced in AMD Athlon chips for personal computers.

In 2004 I thought AMD was going to blow Intel out of the water. I thought the natural conservatism of the IT community would be overcome by the clear demonstrations of AMD's better technology. But in addition to AMD's need to build credibility and overcome the close relationships Intel had with manufacturers, it ran up against Intel's war strategy.

Internally, we now know, Intel admitted the AMD processors were better designed. Externally, Intel used three classic tactics: it used its massive ad budget to create the perception that its products were still superior; it lowered its prices so that AMD could not generate the profits necessary to maintain its process development efforts; and it used well-documented illegal and unethical tactics to keep manufacturing partners from using AMD chips in their designs.

Then, gradually, Intel followed the AMD roadmap. They started making greener chips that had the 32/64 architecture. Finally, they licensed AMD's hypertransport technology and built their own take on that into their chips. Given all that, with Intel's admittedly superior manufacturing capabilities (they can make smaller transistors than AMD, and so get more into similarly-sized chips), today it cannot be said that AMD has any kind of clear technology lead.

In retrospect, Intel used its market dominance to punish AMD for innovating. Prior to the described era of competition, Intel was quite happy to set extraordinarilly high prices for processors. AMD's clones were cheaper (and a year or two behind in design and process technology), but still profitable. If AMD had been content with 10% of the market, Intel would have kept it prices high, in turn guaranteeing AMD profits. It is almost universally acknowledged that Intel wanted to keep AMD alive and profitable, if not really competitive, simply to have plausable deniability to charges of running a monopoly.

Consumers were helped by AMD's technology innovations, but AMD stockholders lost out.

Hopefully the AMD v. Intel lawsuit will sort all that out. Billions of ill-got Intel profits should be rewarded to AMD.

Given the two corporate cultures, I suspect AMD has a roadmap that is in many ways superior to Intel's. To execute on the roadmap, however, they need money, and they need to know that Intel is not going to engage in ongoing anti-competitive practices.

AMD has at least one trick up its sleeve that should be played soon. It has a graphics division that is vastly superior to Intel's. Intel is pouring money into its graphics design division, hoping to catch up before it loses the lawsuit and AMD has the money it needs to pursue its vision of CPUs that do what clients want, rather than what Intel dishes out.

Disclaimer: I own some AMD stock.

See also my main AMD investor page at OpenIcon.com

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