Can AMD seize the corporate day?
He may get by with some help from his friends
Analysis Despite getting heckled by an octegenarian, ceding control of day to day issues to Atiq Raza, and appointing Bob "walk in closet" Palmer to the board, Jerry Sanders III, CEO of AMD remains upbeat about his company's future.
So much so, that Sanders wheeled out his famous gorilla slides again. He is fond of describing Intel as a gorilla. In terms of scaleability, a word US computer firms use over and over again, if Intel is a gorilla, then AMD is not even a chimp. A Mountain Gorilla weighs around 600lbs.
Intel had a turnover of $26 billion in 1998, while AMD had a turnover of $2 billion. In terms of primates, if Intel is a gorilla, AMD is a Mandrill -- one of the largest of all monkeys. AMD is not even a chimp, which weighs around 150lbs.
While Sanders' portrayal of Intel as a gorilla is obvious bunk, the chip giant is concerned about AMD. Andy Grove's famous dictum: "Only the paranoid survive" is alive and well in Santa Clara. It means that Intel will take every step to ensure that it stays big and AMD stays weeny. AMD has a number of factors on its side, some of which are emotional ones.
Intel is seen as being the Great Satan of Chips, the topdog, while AMD is sometimes cast as the underdog, bravely pitting itself against the might of Goliath. Intel, of course, only has itself to blame for this perception. Over the years it has traded, it has gained a reputation for fierce and aggressive competition. The head of Tandem UK once said to us: "You don't tread on the tail of a tiger".
Intel still has lessons to learn about treading lightly. At the shareholders' meeting, Sanders said that Intel's semiconductor revenues exceeded the combined revenues of the next five largest US companies combined. "We are one of those five companies, and the only one to compete head-to-head with Intel in microprocessors," he said.
This statement may be either wisdom or folly. Certainly, other companies such as Cyrix have preferred to take a back seat in this strange contest between the gentle Mountain Gorilla and the Mandrill. Cyrix says it can make a tidy sum of money without getting involved in head-to-head battles with Intel. IDT and Rise probably feel the same. Sanders said that earlier on in this decade, AMD made tidy profits from its 386 and 486 alternatives and was faced with a barrage of law suits from Intel as a result.
In fact, we remember this period well. As Intel phased out some of its processors, AMD manufactured clone chips and mopped up the aftermarket. That changed in 1995 when AMD acquired NexGen and with it Atiq Raza and other high flying execs such as Intel's Vinodh Dham and Dana Krelle. This was probably the best thing AMD did in the last five years. NexGen technology was perceived as being technologically advanced, while AMD was floundering around attempting to develop processors that it had real problems designing.
Raza, Dham and Krelle, frankly, had a far more professional way of approaching AMD's market than the people they replaced. PC vendors do not like relying on one source for products. When Intel introduced the Pentium Pro, that had all types of problems which caused headaches for its customers. Unfortunately, Intel was the only company then supplying chips suitable for the server market. AMD has made a difference to the x.86 market. It forced Intel to follow it, forced down prices and even, if our well informed source at the chip giant is to be believed, resurrected Katmai because of the threat AMD posed.
Intel was late to realise the threat other companies posed in the sub-$1,000 market and rushed out Celeron processors that were underperformers. Now AMD has a large share of the US retail market, 60 per cent, according to Sanders. He said: "We are mounting a successful challenge to an enormously rich and influential company that we can neither out-invest nor out-produce. We are challenging with the most powerful competitive weapon of all: innovation. Or, to put it another way, with better ideas."
He obviously realises the dangers in taking Intel head-on: "The determination to be the nucleating force for an alternative platform represents simultaneously one of our greatest opportunities and toughest challenges."
He said that fierce price competition from Intel compounded AMD's yield problems, resulting in its largest quarterly loss ever. "As the dominant processor supplier, Intel sets the pace of the processor roadmap. It controls the schedule of introduction of higher-clock-speed devices, and in response to competition from the AMD-K6 processor family, it has accelerated the pace of the clock speed race."
Sanders realises that the clock speed, raw MHz fight is a spurious one. He said: "Numerous benchmarks exist for comparing PC processors, and they are subject to much marketing manipulation. Clock speed has thus become the principal battleground of the marketing war for consumer acceptance. AMD is committed to matching Intel clock speeds even as we provide more system performance at a given price point."
Because AMD decided to play the raw MHz game, Sanders admitted that yields were affected. "To support our customers, we pushed both our process technology and our AMD-K6-2 processor design to achieve maximum clock speed...Tuning the process and the design to achieve maximum clock speed while maintaining acceptable yields is an ongoing challenge that ideally involves a series of engineering iterations to achieve optimum results.
"Pushed by Intel to match an ever-faster pace of new product introductions, and pulled by the demands of our largest customers for competitive higher-clock-speed devices, we encountered yield problems last December that carried over into the first eight weeks of 1999 with a devastating impact on our aggregate production in the first quarter," he said.
Sanders said that AMD will spend $750 million on R&D this year and claimed that the yield problems of January and February are a thing of the past. That means, he added, that AMD is now in a stronger position than ever in process technology, production capacity and platform competitiveness than ever. He claimed that AMD can attain the right levels of revenues to sustain profitability and achieve adequate profit margins, but only if the company continued to do well in the consumer sector and achieve better penetration in the commercial sector.
"Corporations buy a lot more computers than consumers do, and the current pricing structure in the commercial sector supports higher processor pricing. Today, our participation in this segment is insufficient to impact Intel's ability to extract monopoly prices there. This enables Intel to subsidize their ability to be extremely aggressive where we do compete," he admitted.
Making K6-IIIs at speeds of 500MHz and above is a significant challenge, he said, and means it will have to move to .18 micron technology using aluminium interconnect. But the K7, claimed Sanders, will allow AMD to break into the enterprise market.
"The AMD-K7 processor will be the first seventh-generation processor on the market," he said. "Based on initial product sampling, we are encouraged by the extremely positive feedback from customers. Nonetheless, the challenges we face in assuring the success of the AMD K7 processor are substantial and unprecedented in our history," he said.
He said that AMD will move AMD K7 technology to copper interconnect technology at its Dresden Fab 30 factory in Q3, giving raw MHz speeds of 1GHz or more by the end of 2001. Of course, Bob Palmer was the CEO of Digital before Compaq acquired it, and so has more than a passing knowledge of the Alpha platform. And, as we revealed exclusively earlier this year, there are plans to make the Alpha and the AMD K7 platforms sing together. Atiq Raza will act as the day-to-day executive in charge of the company and he has a formidable reputation.
All AMD has to do now is to persuade the corporate market to switch to the K7 platform. That, coincidentally, is what Compaq has to do with the Alpha platform. This is a matter of life-and-death for AMD, but Sanders has never been afraid to take risks. Nor, for that matter, has Intel, in this risky chip business. ® <