Corporate market draws AMD's focus

Summary:After grabbing a larger share of the personal-computer market, Advanced Micro Devices is next aiming to take on rival Intel in the all-important corporate PC market.

For years, Advanced Micro Devices Inc. was an also-ran to Intel Corp. when it came to providing the chips that power personal computers. As Intel spent billions of dollars elevating its image with its "Intel Inside" campaign, AMD was as much as two years behind, consistently running into production and design problems and being forced to discount its prices deeply to attract customers.

All that changed this year as AMD (amd), led by white-haired, blustery founder Jerry Sanders, beat Intel (intc) to market with the fastest chips then available and stole market share from the leader. Today, AMD has captured 17 percent of the PC market, up from 13 percent last year, and its chips are used by nine of the top 10 PC makers, with Dell Computer Corp. (dell) the last remaining holdout.

Now, the battle between the two companies is about to become an all-out war. After suffering through disappointing Christmas PC sales, the two rivals are focusing on the all-important corporate PC market, where Intel is the processor of choice and AMD has yet to break in. None of the top makers of corporate PCs uses an AMD processor in its machines for businesses.

"It's the same reason that people bought IBM for years and nothing else," says Ed Coleman, chief executive of CompuCom Inc., a reseller that helps companies choose and install new PCs. He says customers just don't ask for AMD-based systems. "There's a sense that there is less risk in Intel," he says.

AMD must get into corporate accounts if it is to continue gaining market share and avoid vulnerability to price wars in the low end of the market. Though sales are slowing on the corporate side, too, that market accounts for 60 percent of the $141 billion in PC sales world-wide. It is particularly important because of its size and the fatter profits usually gleaned from products aimed at corporations.

Ground zero in the war: the top makers of PCs for business, including Hewlett-Packard Co., International Business Machines Corp., Dell and Compaq Computer Corp. AMD's Sanders has been involved in the talks with IBM, H-P and Compaq, and AMD sales executives have been playing golf with top executives at Dell to try to get them to put an AMD chip in their computers. Because AMD's chips perform as well as Intel's and are often cheaper, this should be an easy sell, but analysts say AMD's legacy of problems and Intel's ability to offer higher volumes and millions in "soft" marketing dollars are huge barriers.

"Intel does not want to allow AMD into any corporate account," says Kevin Knox, research director at Gartner Group, which advises companies on what kinds of technology to buy and which vendors to use.

Indeed, Intel is making aggressive counteroffers as quickly as AMD can get a proposal on the table, some PC makers say. Hewlett-Packard was considering AMD for a low-end corporate box as recently as a few weeks ago, but counteroffers from Intel -- as well as customers' preference for the Intel brand -- killed AMD's chances, a person familiar with HP's decision says.

But AMD has some other things going for it. It has already demonstrated, for example, that once it is in a PC line, end users have little loyalty to anything other than price. And for the first time in memory, it is Intel that is plagued by execution problems, recalling and canceling chips because of design problems and angering customers because it couldn't meet surging demand in the first half of the year. AMD, on the other hand, has been executing nearly flawlessly, increasing production of its Athlon and Duron processors and coming out with faster versions ahead of Intel.

"Intel has not helped itself with its execution issues," says Knox. "As a result, this is as good a time as any for AMD."

One PC maker says AMD has gone so far as to offer a single price for all processor speeds, a major departure from Intel's graduated pricing, and says it will make up for any lost dollars due to PC makers from the Intel Inside campaign.

With more than $1.2 billion in cash on its balance sheet at the end of September, AMD is finally in a strong enough position to offer some cash incentives to customers. AMD has no formal marketing program like Intel Inside. That program, begun in 1991, offers a set amount of supplemental advertising dollars based on how many chips a computer maker buys. In return, the customer runs the five-chime Intel Inside logo on TV or the blue circle logo in print ads.

If AMD were able to offset any hit a customer might take because its AMD purchase would result in lower volume on its Intel purchases, and hence a higher price, "that is big stuff. That would level the playing field," says Roger Kay, an analyst at IDC Corp.

AMD and Intel both decline to comment specifically on any negotiations with customers. AMD says only that it is getting more aggressive. "We spent a lot of years knocking on doors and no one answered. Now the doors are being opened," says AMD's Rob Herb, who runs sales and marketing.

AMD hasn't taken its case directly to business users, something Intel has found effective. Intel has thousands of salespeople who regularly call on the corporate executives who make technology decisions. AMD does have a group of fewer than 100 people who go to conferences and sometimes visit corporate buyers when they can tag along with a PC maker. But AMD doesn't visit corporate customers on its own.

Some corporate buyers say that they don't have any problem considering AMD machines, but that they haven't had the opportunity to compare them. "If one of our suppliers offered it, we would evaluate it," says Mark Marchand, a spokesman for Verizon Communications Inc., which uses more than 100,000 PCs in its business.

Herb and Sanders both say their competitor uses every advantage it can muster when AMD starts making inroads with a PC maker. That includes very aggressive pricing and some stronger tactics like telling PC makers if they want to receive lots of chips that run server computers, they have to keep their corporate PC offerings all-Intel, the two say. Intel spokesman Chuck Mulloy says the company is "not aware of any activity that ties the purchase of one product to another."

Certainly, Intel has an advantage because of its sheer size and the breadth of its product offerings. Intel makes everything from high-powered Pentium III Xeon chips used in servers that dish up Web pages to low-cost Celeron chips for home PCs. AMD won't have competitive server chips until late next year, and its overall volume is only about a quarter of what Intel ships each year.

The issue of volume is especially important in the corporate market, where 61 million units are sold each year. "The biggest challenge [for AMD] is volume," Kay says. AMD will ship about 25 million processors this year, almost all of which will go into the consumer market. The company says it is ramping up production and expects to have enough capacity to handle a 30% world-wide market share.

Still, analysts say AMD must show it has a stable platform of chips that a corporate customer can have confidence in for more than a year. Part of the problem has been that AMD has changed its chip set -- the surrounding components that help run the PC -- or the packaging of its processors too frequently. (And while AMD says it has an 18-month plan of products that shows stability, the company doesn't make its own chip sets, which makes it riskier.) Intel makes many of its own chip sets and motherboards, the main circuit board in a PC. Business users appreciate being able to manage their PCs easily across an organization of thousands of users by using standardized parts.

"It's those two things -- stability and manageability -- that will make or break AMD in the corporate market," Gartner's Knox says.

Topics: Intel, Dell, Hardware, Hewlett-Packard, IBM, PCs, Processors

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