Analysis: Will Intel kill AMD?

AMD doesn't have many options left in the price war against Intel, but is Intel prepared to deliver the final blow?

Despite a brave fight back against the mighty Intel, culminating in the launch of its much acclaimed Athlon processor range, AMD could be readying its white flag following Monday's massive price cuts to Intel's Pentium II and III low-end processor range.

AMD is coming off the back of three disastrous financial quarters, culminating in losses of $163m (£101m) in Q2 this year. The speedy 650MHz Athlon chips have been launched in an attempt to stop the rot.

David Burman, senior analyst for the Butler Group, like many industry observers, acknowledges the current speed advantage AMD is reaping with the Athlon chipset. "We believe that despite Intel's massive discounts at 500, 550 and 450MHz, its 600MHz Pentium III chips would still appear to be slightly more expensive than the latest AMD 650MHZ [Athlon] chips. Intel appears to be gambling that consumers will take a slightly slower speed chip at a reduced price.

"AMD has a long history of fairly impressive chips, and the Athlon does very well in the latest benchmarks," he said.

AMD has already concededthat it must respond to Intel's cuts. This follows AMD chairman W. J. Sanders' acceptance last month that Intel's stranglehold on the low-end chip market -- initially through its cut-price Celeron line, and now through the cut-price PII and PIII chips -- was having a "devastating effect" on AMD's business.

But Burman believes strong competition will continue in the market and that Intel is not yet in a position to eliminate its rival. He concedes that AMD hasn't got the muscle to damage Intel in a significant way and that Intel is far from "quaking in its boots", despite losing the all important speed advantage.

Calls today confirm AMD is undecided on its price reductions, but it is highly unlikely to mirror Intel's, which were as high as 41 percent off Pentium III 500MHz chipsets.

Undoubtedly the company is under pressure and Sanders has already admitted the average selling price of AMD processors needed to exceed $100 per chip for the company to remain profitable -- a statement that looks set to haunt him. Average chip prices prior to the Athlon launch were spiralling towards the $50 mark. Wednesday a K6 2 400MHz will cost £40 (roughly $63) from a UK reseller.

One UK distributor Wednesday was buying Athlon (K7) chips at prices ranging from £155 ($246) for a 500MHz processor to £390 for 600MHz. Although these unit prices will undoubtedly patch up AMD's average chip prices in the immediate future, there remains nothing to prevent Intel's forthcoming Coppermine processor development work dragging down K7 margins in the same way Celeron forced AMD's K6 range to trade for small change.

One industry observer suggested AMD would only be able to sustain the pressure of successive price cuts for as long as Intel allowed it to play in a market place Intel regards as its own. Undoubtedly, Intel is considerably better-positioned to take the substantial financial hit that follows hefty price cuts. The strategy of cutting margins for a long-term fight is more suited to Intel. More price cuts make Intel look good. Burman explained: "It's the old story of marketing over technology in some ways. Intel is fortunate to be in the strange position of making components that are more famous than the boxes surrounding them."

"It's not a one-horse race," he concluded.

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