Shh! AMD cuts chip prices--quietly

Although Advanced Micro Devices has said it won't engage in a price war with Intel, the chipmaker is quietly discounting its processors to keep up with its rival.

Although Advanced Micro Devices has said it won't engage in a price war with Intel, the chipmaker is quietly discounting its processors to keep up with its rival.

Sunnyvale, Calif.-based AMD quietly cut prices on its Athlon line of processors earlier this week, according to sources. Later this week, the company is expected to announce the price cuts and declare them retroactive.

Under the new cuts, the official price for the 1.3GHz Athlon will drop 45 percent from $318 to $175 and the 1GHz chip will drop 31 percent from $204 to $140. The cuts will also help pave the way for a 1.4GHz Athlon coming in a few weeks.

The price drops aren't nearly as drastic or sudden as the math might indicate, however. The chips have actually been selling for less than the posted price for the past few weeks. Computer dealers, for instance, are currently selling the 1.3GHz chip for $193 to $203 at retail, about the same as a 1.3GHz Pentium 4. The 1.2GHz Athlon sells officially for $294 at wholesale, but can be bought at retail for $153 to $166.

Why the confusion? Historically, a huge discrepancy exists between the "official" wholesale price AMD charges for chips in 1,000-quantity lots and the price AMD actually sells the chips for because the company often offers discounts to distributors and computer dealers that purchase more than 1,000 chips.

"Price is set with negotiations with each customers," an AMD representative said earlier this year. "If they buy more than 1,000 units, they can negotiate price individually."

Eventually, these chips hit the market at prices lower than the official rate. Intel offers similar volume discounts, but on a strict sliding scale. The discounts also aren't as large, according to sources.

In addition, AMD will tweak its prices ahead of official price cuts to combat the "gray market." When the computer market slows down, distributors and computer makers will dump their excess inventory into the gray market, a collection of unauthorized dealers. To ensure that authorized AMD dealers and manufacturers can compete, the company will offer selective discounts.

In the beginning of April, for instance, AMD cut prices for authorized dealers and then came out with the "official" price cut April 18.

In a conference call earlier this month, AMD CEO Jerry Sanders said he would avoid a price war but still price chips competitively against Intel's.

Some dealers received word of the latest price cuts toward the end of last week.

"I think it was a very last-minute thing," said Rob Guella, proprietor of reseller RBComputing in Ottawa, Canada.

The cuts will serve to help AMD stay competitive with Intel and boost demand for its chips, analysts said.

"AMD can afford to cut prices on the top end. The margins are fairly healthy on the top end and the volumes are low," said Dean McCarron, principal analyst at Mercury Research. "Compared to Intel, AMD can afford it more. There is a smaller distance to fall. Nevertheless, I'm sure the preference would be to not do that."

Other analysts, however, have said that AMD is at a disadvantage in terms of megahertz. Intel's Pentium 4 tops out at 1.7GHz, while the slowest Pentium 4 runs at 1.3GHz. Because of the megahertz obsession among consumers, AMD is forced to price the 1.3GHz Athlon, its fastest chip, against Intel's slowest, Kevin Krewell, an analyst at MicroDesign Resources, noted earlier this month.

As a result, Intel can potentially drive down AMD's prices by coming out with faster chips and discounting the bottom end of the line. AMD, however, has been gaining market share and getting strong reviews from benchmark testers.