AMD and Intel Escalate Their War

Of course, everyone has heard by now about AMD predicting a loss for Q1 ’99, and most publications are focusing upon the financial issues for the company. While this is important to investors, and of course important for the long term success of the company, it also indicates that AMD is still committed to waging their war with Intel. Consumers should be smiling at this news, because it means that further price reductions from both Intel and AMD are still ahead.

Tom Kehoe from AMD’s PR department indicated in a phone interview on Thursday that the K6-3 is still expected to ship on time, and confirmed that production facilities were being beefed up to handle the expected demand of both K6-2 and K6-3 processors for Q2 and beyond. He also insisted that the K7 will be on time, and claimed that while no major chipset manufacturers had yet provided a firm committment to building a chipset for it, AMD is well prepared to go forward with their IronGate chipset.

Kehoe admitted that the announcement that there may be a Q1 revenue shortfall had caused a flurry of activity, but he also indicated that there was “a lot more happening”, though he provided no details. In all likelihood, executives are reworking their strategies to combat Intel’s onslaught on the low end as well as looking for ways to slash costs. Recently, it had been reported that AMD had sold their World Headquarters building for $95 million in order to finance improvements in their production facilities, however Kehoe indicated that AMD had a “no comment” policy on this issue.

The news of the projected revenue shortfall should not be surprising for those who have followed the marketplace, as shown in our news article Intel Counter Attacks from two weeks ago. Though Intel, in their arrogance, allowed AMD to grab significant market share over the past year through aggressive pricing tactics, it was only a matter of time before Intel would wake up and smell the coffee! The real question is whether AMD will be able to weather the storm over the next few quarters, and whether the March 9 anti-trust trial will slow down Intel at all. In fact, it isn’t entirely out of the question that the timing of the announcement was designed to have an impact on how that trial proceeds.

A source from a large component manufacturer, who requested he remain anonymous, said that AMD engineers had informed him that yields on the K6-3 chips are still below 50%, and that the 256K on-die cache has some stability problems due to power and heat issues. This source said that volume production may not occur until as late as May of this year, or perhaps not until the transfer to .18 micron technology. Kehoe denied these claims, saying that he was not aware of any yield or stability problems with the K6-3, though he also said that no media samples had been shipped yet.

Though AMD claims that the K7 is right on schedule, this same anonymous source indicated that there may be problems there as well. VIA, SiS and ALi have all been given licenses to produce Slot 1/Socket 370 chipsets by Intel. This source speculated that Intel may have put restrictions on these chipset manufacturers to hinder them from developing products for AMD processors, as information from these manufacturers has literally stopped since the agreements.

If true, these restrictions would likely be in the form of restricted public comments. When Intel invested $500 million into Micron, the agreement was apparently set up such that Micron could not promote SLDRAM over DRDRAM, and could not make any potentially damaging comments regarding DRDRAM, including any problems encountered in development or production. Micron was one of the leading proponents of SLDRAM, and now it has lost visibility in the marketplace as Intel continues to tout DRDRAM. The net result is that chipset and motherboard manufacturers scrapped plans to implement SLDRAM, believing that the market has no interest. Note that these restrictions did not extend to PC133 and DDR SDRAM, both of which are being promoted publicly by Micron and others.

All-in-all, this situation should be seen as an indication that AMD’s strategy has worked very well over the past year. In fact, it may have worked *too* well, forcing Intel to retaliate with vigor. The fact is that Intel may very well be creating revenue problems of their own with this rapid-fire release of low-end processors. Never before has Intel bumped the speed of a line of processors as fast as they have with the Celerons. In December, the fastest Celeron available was the 333MHz, and in just one month the 433MHz will be released, followed quickly by the 466MHz. Unless Intel also speeds up the release of their Katmai processors, the Celeron line will quickly approach the speed and performance of the fastest ‘high-end’ desktop processor, blurring the line that Intel has been trying so hard to create.

AMD’s future will depend upon how well the K6-3 sells, and whether they can produce enough units to satisfy the demands. Though new equipment has been purchased, it typically takes several months to bring it online. Kehoe indicated that AMD expects the additional production capabilities should be realized sometime in Q2. Until then, AMD may be faced with the difficult question of whether to sacrifice K6-2 production in favor of K6-3, or vice-versa. In the meantime investors are faced with the dilemma of trying to determine if either stock is a good investment at this time. While AMD dropped almost 10% during Thursday’s trading session, Intel also suffered with a drop of over 6%. Consumers, on the other hand, are waiting to count their savings.

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