Price war hiatus likely for Intel, AMD

With AMD's second-quarter earnings results now history, analysts say it's unlikely the two will continue their profit-draining price battle.

Cutting prices further would erode each company's average selling prices, and the resulting revenue hit would likely offset any market share gains.

The price war comes down to, "How much of your own revenue are you willing to sacrifice to hurt a competitor?", said Dean McCarron, principal analyst at Mercury Research. Intel and AMD may be deciding that enough is enough after a recent round of particularly bruising price cuts, he added.

Intel sparked the price slashing at the end of April when it dramatically discounted its Pentium 4 chip to help move the processor into the mainstream of the PC market.

The leading maker of PC processors essentially rolled two months worth of price reductions into a single, large cut, lopping as much as 55 percent from the price of its Pentium 4 chips.

Determined not to give back any of its hard-won market share, AMD quickly countered by dropping its Athlon prices. Additional cuts were made during the subsequent two months.

AMD won a victory of sorts. The company was able to boost its market share slightly and increase the number of chips it sold from 7.3 million in the first quarter to 7.7 million in the second quarter. But what it gained in market share it lost in revenue.

Comparing AMD's first-quarter average selling price of US$90 to the second quarter's US$75, CEO Jerry Sanders calculated the company lost out on US$115 million in revenue.

Analysts said Intel, which ships close to 30 million processors per quarter, stands to lose much more if price cuts continue at the present pace.

Intel might already be moving prices in a new direction by charging a greater premium for its latest technology. Consider the most recent Pentium 4 launch: Intel brought out its new 1.8GHz Pentium 4 at US$562.

The US$212 gap between the 1.8GHz and its nearest sibling, the US$350 1.7GHz version, might signal a change in Intel's thinking.

"I think what Intel is trying to do is restructure its prices," said Nathan Brookwood, principal at research company Insight64.

Intel might be attempting to move back to older price charts that topped out around US$650. For example, the company is expected to introduce its new 2GHz Pentium 4, due this quarter, at near that price.

"At some point, (AMD and Intel) have some incentive to migrate prices somewhat higher," McCarron said.

AMD, for its part, does not need to reduce prices any further to gain sales, although it would have to react to any Intel cuts, McCarron said.

"The problem (AMD) has to deal with now isn't so much shipping more units," McCarron said--it's fixing its average selling price.

AMD can do this in one of three ways: By selling more expensive chips, increasing its mix of Athlon vs lower-cost Duron chips, or not reducing its prices as much.

AMD will introduce two new mobile Athlon 4 chips, at 1.1GHz and 1.2GHz, during the third quarter, Sanders said in a post-earnings conference call with analysts. The chipmaker will be able to charge more for these new processors, as mobile chips are traditionally priced higher than their desktop counterparts. AMD will also introduce new mobile Duron chips during the quarter.

"Our target there is 50 percent share of the US retail mobile market by year-end," Sanders said.

New desktop Athlons at 1.5GHz and 1.6GHz version are also expected this quarter. A 1.73GHz desktop Athlon will be "the next major speed grade", Sanders said; it is due in the fourth quarter.

Meanwhile, Intel reports earnings Tuesday and if its second-quarter earnings are results like AMD's, it will show a mixed bag of strong mobile sales, slow desktop sales and lagging flash memory sales.

Why so much doom and gloom? Blame the economy. AMD's two main products, flash memory and PC processors, have been affected by slow sales in their respective markets--cellular phones and PCs.

Despite a less-than-rosy outlook for the third quarter, AMD expects to bounce back in the fourth quarter.

"Our goal is to break even in (the third quarter) and return to profitability" in the fourth quarter, Sanders said.

The company expects Microsoft's new Windows XP operating system, scheduled to be released in October, to boost PC sales in the fourth quarter. AMD expects sales of flash memory to pick up in the fourth quarter as well.