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Will Intel Take a Loss on Each CPU, but Make It Up in Volume?

Written By: R. Krause
Published On: April 21 2000

Will Intel Take a Loss on Each CPU, but Make It Up in Volume?
R. Krause - April 21st, 2000

Event Summary

Advanced Micro Devices (AMD) may finally be able to break into Dell Computer Corporation's product line, according to sources quoted by Forbes.com. Reports indicate that Dell is negotiating to buy approximately 100,000 of AMD's upcoming "Spitfire" chip. Spitfire is expected to compete against Intel's Celeron chip, their low-end CPU.

This report comes barely two months after CEO Michael Dell stated quite publicly that his company had no plans to use AMD chips (including the high-performance "Athlon", AMD's competitor to the Intel Pentium III). This would also mark the third or fourth high profile win for AMD in recent months (Gateway and Hewlett-Packard were the others.)

There has been no mention of Dell considering any other chip than the Spitfire. When AMD started shipping its Athlon CPU, some observers expected Dell would consider it as an alternative for Pentium III - class machines. However, that has not happened as yet.

AMD has suffered from the perception that it's manufacturing facilities were unable to provide the same level of service that Intel's fabs were, That perception appears to be changing as AMD gets more quarters of satisfied customers under its belt.

Market Impact

If this deal actually gets consummated, it is really bad news for Intel. Dell has been Intel's strongest supporter in the ranks of PC manufacturers, publicly refusing to consider AMD. We expect that if such a deal truly is under consideration, Intel will resort to the tactic of cutting a great deal with the manufacturer. This worked (for a short while) with Gateway, and also appears to be the reason Microsoft chose Intel for the CPU in its upcoming X-Box gaming console. If Intel decides to play the price-cut card, this will put a damper on Intel's profit expectations, since Dell now occupies the top position in U.S. PC sales, having passed Compaq last year.

Because of the bus speed at which the Spitfire is expected to operate (200 MHz), its performance should exceed that of the Intel Celeron - the chip against which it's designed to compete. If AMD can post great performance numbers against Celeron, and keep prices down, then that's another market where Intel will feel AMD's breath on its neck.

When AMD produces Sledgehammer, there's a reasonable chance it will give Itanium/Merced (Intel's future 64-bit CPU) a run for its money. In fact, Sledgehammer may hold a slight edge, due to its announced backward compatibility with x86 applications - something Itanium will not have. (Note that neither product will be here until at least September 2000, and AMD's claim of x86 compatibility must be thoroughly verified once the product ships.)

If the deal goes through, the psychological boost will be huge for AMD. They have been trying to break Intel's hold on Dell systems, at least partially, for quite some time. Michael Dell has publicly talked about reasons he has/had no plans to use AMD. But as the saying goes, "Things change".

The big question is: what will Intel do when AMD finally produces a chipset that will allow AMD CPUs to be used in a multiprocessor server. Presently, Intel owns that server space completely. (We of course mean Intel architecture servers. There are numerous variations of multiprocessor servers in other architectures.) If AMD can finally produce the HotRail chipset (which will make AMD multiprocessor servers possible), and make it work credibly, Intel will be in real trouble.

User Recommendations

Assuming the reports are true, and assuming AMD makes good on its commitment, this is good news for the consumer. If Dell sticks with Intel, it will probably be the result of price reductions. If Dell goes with AMD, the CPU will most likely be less expensive than current Celerons. No matter who the vendor, we expect the result to be lower prices. If AMD can generate enough volume from Dell, this should drop the Spitfire price even further. (As with many commodities, CPU prices are largely volume-driven: as volumes increase, prices decrease.)

On a less pragmatic note: people who view Intel as being too powerful in the chip business will be rooting for AMD to succeed, if for no other reason than to keep the market a little more balanced. Intel has been cleared of wrongdoing (vis--vis monopolistic practices), but there are still techies out there who believe otherwise.

 
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