AMD vs Intel: Technology, Competition, and Sustainability

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the PC industry, someone would have sued and won. It rose to dominate PC sales but did not control the industry. Intel designed the 8086, but only grew to dominate the x86 compatible industry by moving up-market, and cutting prices on the newer more powerful chips. AMD struggled to compete, even though it lost money many years. It carried out its own R&D program and acquired outside firms and got substantial subsidies from Germany and Saxony to build Fab 30 in Dresden. It survived, and now has some superior products. It continues to get huge subsidies from Germany. It can sell more chips than it can make. so it contracts foundry products from IBM and Chartered. AMD enjoyed a rise in stock prices from 2003 to 2006 (although though it has since fallen) while Intel’s stock price has trended down since 2001. The antitrust suits may have helped preserve competition in mainframe computers for a while, but could not preserve the industry itself. Antirust and patent suits against Intel, may have helped preserve competition in the minicomputer industry, but could not preserve the minicomputer industry. AMD’s antitrust suit against Intel may preserve a competitor, but it is only German subsidies that keep AMD alive. Without the German subsidies, AMD would have had ten years of losses, but would not have been able to manufacture the microprocessors the sale of which kept it alive. The antitrust laws did not prevent IBM from dominating the mainframe industry in the 1960’s and 1970’s when IBM sold about three-fourths of mainframes in the world, and the Department of Justice sued for violating the Sherman Act. Control Data Corporation (one of the “seven dwarfs”) also sued and shared discovery with DOJ. CDC settled for more than a billion dollars. IBM was smart enough to avoid signing exclusive deals with Intel and Microsoft which were able to supply companies making IBM compatibles. It required Intel to license competitors, so clone makers could buy compatible chips. Antitrust law and IBM’s forethought prevented Intel from monopolizing the PC chip market. During the past 25 years, antitrust forbade Intel from acquiring or destroying AMD or from formally dividing the market with it. There were many times in which a merger or cartel would have been highly profitable to both corporations. The recent fall in the price of both stocks and chip prices means that active price competition between them has not benefited Intel or AMD. A well-behaved duopoly of Intel and AMD would have made both of them more valuable, but price concessions would have had to be made to the PC sellers to keep them quiet. Antitrust laws has prevented PC makers from combining and forming a bilateral monopolies with the hypothetical chip or software monopolists. As a result, no one in the microprocessor and computer business is making any great amount of money. Most of the profit of manufacturing PC’s has been squeezed out over the years by Intel and AMD’s price structure. It is amazing that both firms in an implicit duopoly can maintain gross margins of 57 to 60 percent. Intel’s recent price-cutting, discounts and concessions prompted AMD’s antitrust suit against Intel. Had Intel quietly accepted an inferior competitive position (as AMD did when it produced inferior parts), AMD could have charged premium prices, built its capacity, paid down its debt, and piled up profits. Instead Intel launched a strong defensive campaign. The Core 2 Duo was introduced, and Apple singed on as a customer. While quality and performance issues remain, Intel is building two new giant fabs, hardly a sign of resignation. It has sold off money-losing 8
divisions, and has cut employment by 13,500. It has sold several billion dollars of convertible bonds to finance its new construction, and continues to buy back stock. It has repurchased $56 billion since 1990. Former CEO Jerry Sanders had earlier refocused AMD on the microprocessor and flash market and had negotiated Fab 36. AMD enjoyed at remarkable superiority in its Opteron aned Athlon chips in 2003. Intel’s response was slow. It may not be true, regardless of what Intel claims, that it has regained operational superiority. Intel’s Core 2 Quad chips has been promised for November will have the top end of the market to itself for a while. This might permit Intel to regain lost ground in servers. The great game is far from over, but performance and capacity have moved far enough ahead that a restoration of stable duopolistic relations may not occur. Acquisition of ATI will reclaim more of the real estate in the PC for AMD.. The $7.2 billion dollar price may very well be too much for it to handle, and the debt burden may prevent profits for years, especially if Intel drives PC and chip prices even lower. It is obvious from recent stock price movements that the market is not optimistic about the future of the two microprocessor firms. The transformed industry will have much larger capacity and much lower prices. Stock prices may not recover for many years. The struggle for new markets – such as chips for a billion very cheap student computers – over the next five years may look like a great opportunity for AMD or Intel, but it is not. Another example of competition is the 2B1 vs Eduwise struggle. On September 29, Intel it announced a low-priced ($250) “Eduwise” laptop design with a 900 MHz Celeron D microprocessor aimed at poor students, which has full features, including an embedded Windows XP operating system. Mexico has already ordered half-a-million pieces. The Eduwise is planned to cost $110 more than the 2B1 produced by OLPC (one laptop per child) developed by Nicholas Negroponte of the MIT Media Lab. The screen is a 7.5 inch 1200 x 900 pixel TFT self-refreshing display with 200 dpi resolution. There are several potential producers of cheap, slow x86’s, such as Via which has recently acquired Centaur, or Rise, both of which have x86 licenses and designs. China, Taiwan, and Singapore all have giant foundries which can crank out huge quantities of very cheap x86s. AMD has strategic value to Germany or China that far exceeds its market value. AMD has already licensed Beijing University for some x86 intellectual property. China hundreds of billions in foreign exchange lying around unused. It could easily and almost invisibly acquire control of AMD and present the corporation and the U.S. government with a fait accompli. If AMD built six or seven fabs with China’s money, and started producing the hundreds of millions of chips China’s will need the world price of top x86 chips would fall ’s market (protected by a 30 percent tariff) and financial resources behind it would . 9
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AMD vs Intel: Technology, Competition, and Sustainability

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