Why Intel needs AMD

What would Coke be without Pepsi?

It would be a monopoly. If one company were controlling the vast American soft drink market antitrust officials would have no choice but to move in.

But with two such companies there is balance to the force. Never mind you're paying $1.50 for a glass of fizzy, sugared water.

The same is true for Intel and AMD. Whether an oligopoly is as economically troubling as a monopoly is not the question. Legally they are two different things.

So Intel's decision last night to settle its current antitrust and patent suits with AMD for $1.25 billion is good business. Even if it is forced to pay the EU another $1.5 billion it's cheap as chips. Wall Street 24/7 calls these payments bribes but what of it?

Because if you have been reading Smartplanet regularly these last months (and I do hope you have) Intel has a problem even Coke cannot conceive of.

Competition in this market is doomed by Moore's Second Law. As chip complexities rise so do costs. Eventually complexity means you're building chips atom-by-atom -- there's a natural limit. But long before that limit is reached production costs may approach infinity.

So the folks at Intel should be popping the champagne on news that AMD is expecting a better year next year.

AMD has a long term survival plan, which started with the spin-off of its chip fabrication to a new company called Global Foundries, complete with a heavy investment from Abu Dhabi, which has a controlling interest in the new company.

The Intel money, plus the cash generated by the spin-off, should give AMD designers and engineers plenty of time to roll out new designs and keep a small share of the market, while Intel keeps its lions' share.

But the Moore's Second Law trap remains. Perhaps the biggest story of the next decade will be finding whether there is a way out of its co-founder's dream.

This post was originally published on Smartplanet.com