'Pragmatic' Intel seen in AMD deal

Intel's settlement with AMD avoids costly and lengthy legal battles and signals Intel looking to reduce reliance on PC and server markets, says analyst.

Intel's settlement with AMD is seen as "pragmatic" on the part of the market leader to avoid lengthy legal battles and further court damages, according to an analyst.

John Spooner, senior analyst at Technology Business Research (TBR), said Friday Intel had chosen "to control its own destiny and settle upfront" by making peace with its chip competitor.

The two companies announced Thursday in the United States they have reached a settlement over a long-time dispute over Intel's alleged antitrust practices. As part of the agreement, Intel will pay AMD US$1.25 billion and the pair will enter into a new five-year cross-licensing agreement over x86 technology. The smaller chipmaker will also drop its litigation in the United States and Japan.

Using the fine dished out by the European Commission as a gauge, Intel could potentially face treble damages of over US$4 billion by allowing the antitrust suit to drag on, he said Spooner.

The decision to settle, he noted, is also a sign of Intel's "broader change in strategic direction".

"Intel has been preparing to reduce its reliance on the PC and server processor market, which now supplies more than 90 percent of its quarterly revenue," he pointed out. "The chipmaker has been re-aligning itself to expand its revenue base into graphics, handsets and consumer electronics. It will leverage its 32-nanometer manufacturing technology to make a significant push into these markets in calendar 2010."

Still, it will "take time" for the full effects of the settlement to pan out, particularly when it comes to government antitrust probes on Intel, he added. In the near-term, Intel will continue to "compete aggressively", especially in a PC market expected to return to strong unit growth next year, said Spooner. Intel, he noted, has around 80 percent market share in the PC and server processor space.

In a conference call with media Thursday in the United States, Intel CEO Paul Otellini also described the settlement as a practical move. According to ZDNet Asia's sister site CNET News, reactions from investors suggested that AMD gained more from the transaction than did its rival: Intel's share's price dropped marginally, while AMD's stock rose 22 percent.

Deal improves AMD's long-term viability
Aside from the cash injection, the smaller chipmaker gains in two distinct ways, according to Spooner.

The settlement terms will especially help allay concerns from AMD's PC and server OEM (original equipment manufacturer) partners about reprisal from Intel for using AMD processors, he noted. Another benefit is that AMD improves its longer-term viability with a five-year extension of the pair's x86 cross-licensing agreement as well as specific provisions for its manufacturing arm Globalfoundries to produce chips without legal threat from Intel.

According to Spooner, AMD "very strongly believes" the settlement opens the door to "significant market share gain". This, he added, will boost the company's revenue and profitability even as the industry rebounds in the year ahead.