AMD: A tough road ahead

NEC, the second-largest Japanese server seller after Fujitsu, said Monday it's using AMD's 1.33GHz Athlon chips--its fastest CPU so far--to power a special-purpose server "appliance" that will be able to send streams of video over the Internet. The rack-mountable system uses one server to encode video and audio information and two more servers to send the information out over the network.

AMD has embarked on an ambitious effort to sell CPUs for use in servers, the comparatively powerful computers that run network services such as sending out Web pages, running voice mail systems or keeping track of company inventory. In the server market, profit margins are plumper but customers are more demanding.

AMD has no choice but to enter the server market to compete with Intel, said Technology Business Research analyst Humberto Andrade. Currently, Intel can subsidize aggressive price cuts on the products that compete with AMD by charging more for products where AMD doesn't compete, Andrade said.

"You've got to have a full line," he said. "It's like automobile manufacturers with a small car, medium-sized car, a full-sized car, an SUV and a pickup. If you have all those segments, you're a strong competitor.

"Intel can drop prices to compete as much as they want if they still have profit on the other segments."

Low-end servers, while not as sophisticated as million-dollar machines from companies such as Sun Microsystems, Hewlett-Packard and IBM, still are a cut above desktop PCs, with requirements for more and higher-quality memory, faster and longer-lived hard disks, faster network communications and other features.

The low-end server market--systems costing up to $100,000--grew 7 percent last year, from $29 billion in 1999 to $31 billion in 2000, according to market research firm IDC.

AMD has grown more ambitious with its Athlon line, which for a time ran at faster speeds than Intel's top-end models and which enabled AMD to grow out of its previous low-end, low-margin stronghold. Intel has responded with an aggressive push to sell its new Pentium 4 line, charging a mere $352 for its top-end 1.7GHz model.

"It's definitely a bloody price war," Andrade said.

But penetrating the server market is a different game altogether. Not only must customers be convinced that AMD's chips have high enough performance, but AMD has to convince server sellers it's in it for the long haul and go up against joint marketing agreements and other tested Intel sales tactics.

To make headway in the server market, AMD will first have to make more than its current limited progress expanding from home PCs to corporate models, said TBRI analyst Brooks Gray. That route wins over conservative corporate buyers to provide an entryway to higher-end bids.

"The progression needs to be through the corporate desktop channel first, then you can move into servers," Gray said. "I'd be very surprised if AMD can jump from consumer desktops...to a broad presence in the server market. The 'Intel Inside' brand clearly pulls more weight."

People and products
Major new products from AMD will provide the technological underpinnings for a more ambitious server initiative, though. The company will release a new high-end "Palomino" chip that, when paired with the AMD-760MP chipset, will enable two-processor servers and workstations.

In addition, more powerful AMD chips that can process 64-bit instructions are due in the first half of 2002, a spokeswoman said. The Clawhammer, targeted for single-processor and two-processor servers, is expected in the first quarter of 2002, while Sledgehammer, for four- and eight-processor servers, is due a quarter later.

Designing the underpinnings for multiprocessor systems is tough, though, as Intel can attest. It faced numerous delays with its "Profusion" chips that enabled eight-processor Intel systems. Multiprocessor systems require special-purpose chips to link the CPUs together and to connect them to memory and other parts of the computer, a comparatively new area for AMD.

Reinforcing the technology is the addition of new personnel at AMD. The company has hired Kevin Knox, formerly an analyst with Gartner, to help plug its products to corporate customers. And leading the server and workstation marketing effort is Ed Ellett, who previously promoted Compaq Computer desktop PCs.

AMD's allies
AMD has a handful of server partnerships, but some of the news of late hasn't been good for the company.

Allies include U-tron Technologies and Net Integration Technologies--a far cry from the biggest names such as Compaq, Dell, HP and IBM that sell Intel servers.

Cobalt Networks, acquired by Sun Microsystems in 2000, sold AMD-based servers for dishing up Web pages. But the newer Cobalt products are based on Intel's Pentium chips. And Penguin Computing said it was dropping Athlons from one server line because it didn't support two-processor systems.

AMD thus far has only a "minimal" presence in the server market, said ARS Market Intelligence analyst Steve Greenberg, but the NEC deal will help. "This recent news by AMD is a strategic move in which it will enable the company to penetrate into the corporate enterprise market."

NEC, though, isn't the strongest of allies. The company is the ninth-largest server seller worldwide, with the vast majority of its sales in Japan. And NEC's PC shipments slipped 0.5 percent to 1.5 million units in the first quarter, according to recent figures from Gartner.

But AMD has strong allies in the desktop market, Andrade said, which could prove fruitful in its server push. In Japan and Europe, NEC and Fujitsu have close ties with AMD, he said.

"They have relationships with every single important (computer maker) out there but Dell," Andrade said.