Tough times for AMD - needs more than cuts

AMD is walking an investment tightrope and faces falling down the abyss if it doesn't manage to broaden its product line and succeed with the K6-3 and K7 processors.

In its attempts to keep up with Intel's latest product realignment, AMD has made swinging cuts to maintain its policy of undercutting Intel's pricing by around 25 per cent.

The key realignment is the 450MHz product. Intel has positioned its Pentium III 450MHz chip as its next major volume product and AMD has had to match it with its K6-3.

"The Intel PIII 450MHz processor is now the sweet spot and AMD has had to drop its pricing to compete and stand a chance of getting its 450MHz product accepted by the market," said Joe D'Elia, senior semiconductor analyst at Dataquest Europe.

Despite price cuts, Intel has continually managed to keep its average selling price stable, due largely to the introduction of more expensive processors for high end PCs and servers. AMD has targeted the $100 (£61) mark as its average selling price but is finding it hard to match Intel's steps.

According to D'Elia, the pressure on AMD this year is huge. It needs to broaden its product range to enable it to achieve better margin on its overall turnover.

"This is a crucial year for AMD," said D'Elia. "It needs to get everything right, particularly with the K6-3 and K7 processors. If it doesn't, investors will lose patience and the company will struggle." D'Elia added AMD is trying to break into new areas, "particularly into the portable space" but said that this calls for further investment with little immediate returns. "AMD needs to expand but in doing so is exposing itself financially."

AMD will continue its fight back at the beginning of next month when it is expected to release its K7 in 500MHz, 550MHz and 600MHz versions.