For months, most of the news from chipmaker Intel (INTC) has been bad. With rival Advanced Micro Devices (AMD) logging steady gains in the markets for PC and corporate server chips, Intel’s inventories piled up, pushing its gross margins last quarter below AMD’s for the first time. Meantime, its stock is trading at about $18, down from a peak of $29 a year ago. And on July 19, Intel reported another disappointing quarter, with revenues sliding 13%, to $8 billion, and net income falling 57%, to $885 million.
Now Intel’s prospects may be about to brighten. After two years on the defensive, the company is launching a major counterattack. This spring, Intel began lowering prices, taking $200 out of the cost of some PCs running its chips. And on July 27 the Santa Clara (Calif.) chipmaker will introduce a new family of processors, called the Core 2 Duo, that combines the performance of its Pentium 4 desktop chips with the energy-saving features of its processors for notebook computers. "We intend to energetically compete for every single microprocessor opportunity in the industry," says Intel Executive Vice-President Sean Maloney.
Analysts say the chips beat AMD’s at most tasks and should help Intel win back PC market share. But, they point out, AMD is entrenched in the market for corporate servers and won’t easily be dislodged. AMD President Dirk Meyer says he'll do whatever it takes to compete, including cutting costs and slashing chip prices: "We’re going to continue winning business by making sure we’re the smarter choice for our customers."
GOLDEN OPPORTUNITY? If there’s an all-out price war, Intel has the advantage. Thanks to new manufacturing techniques at three giant plants that squeeze more transistors onto a chip, its processors cost less to make than AMD’s. That allows Intel to offer lower prices without the dramatic profit declines it suffered over the past year. AMD won’t be able to match Intel’s manufacturing technology until mid-2007.
So Intel is in a position to win the lion’s share of what is expected to be the biggest PC upgrade cycle in more than six years. Demand is predicted to pick up because of the long-awaited arrival of Microsoft's (MSFT) Windows Vista operating system. Vista rolls out later this year for business PCs and early next year for consumers.
While some analysts worry that slowing economic growth could hurt PC sales, Intel is betting it can work off its inventories—now at a record level—and hurt AMD, too. Even as it pushes its new, higher-end chips, Intel will continue to use its old warhorse, the Pentium, to lure budget-conscious consumers. It’s a gamble. But Intel aims to take advantage of the brief window it has before AMD retaliates.