AMD Inside

In the face of stiff competition, Dell is finally adopting AMD's server chips. Is it too late to regain lost market share?

Dell can't say it wasn't warned. For months, chipmaker Advanced Micro Devices (AMD) tried to convince Dell to end a policy of offering only Intel-based servers and computers to customers. AMD execs argued that big business customers were demanding choice and innovation. Dell steadfastly refused to budge.

Meantime Dell (DELL) rivals Hewlett-Packard (HPQ), IBM (IBM) and Sun Microsystems (SUNW) nabbed share and profit in the lucrative market for the high-end servers that run Web sites and corporate data networks. Dell is finally coming around. On May 18, while releasing a report that said first-quarter profit fell 18%, Round Rock (Tex.)-based Dell said it will adopt AMD chips by the end of the year in the high-profit multiprocessor, ultra-dense server line that businesses are snapping up in droves (see BW Online, 5/19/06, "From Servers to Service: Dell's Makeover"). It could be the first step in what is likely to be a wider Dell adoption of AMD products.


  Dell had planned to announce it would add AMD multiprocessor servers later this year, but company executives told AMD executives on Tuesday that they were advancing the timetable. "The competitive dynamic has been more intense than we expected," Dell CEO Kevin Rollins said in a conference call with analysts.

It's early to say whether Dell's late entry into the market for AMD-based servers will help it regain lost share. But it's clear the move is a major win for AMD. Even as AMD gains traction in servers, desktop PCs and notebooks with the likes of HP, Lenovo and IBM, it has long coveted business with Dell. AMD's stronghold has been the four-way server segment, where it now is approaching an estimated 45% share in the U.S.

Dell's announcement is the biggest validation yet that AMD is pursuing the right strategy against archrival Intel (INTC). AMD recently launched a multimillion-dollar advertising campaign touting the cost savings companies experience with their products (see BW Online, 05/03/06, "AMD Sticks It to Intel -- Again"). The company has been gaining share in both servers and in the retail desktop space, wowing gamers and enterprises alike.


  Companies such as the DreamWorks film studio over the past two years have decided to completely replace their Intel Xeon server chips with AMD's Opteron offerings made by HP, which have won accolades for being more energy efficient and better performing some tasks. That saves companies thousands of dollars each month on electricity bills and lets them replace larger servers with sleek products that take up less room. "We've proven that we've got a good track record of working with our partners so that they experience profitable growth," AMD Senior Vice-President Marty Seyer said.

Intel had hoped to stem customer defections with a new slate of products later this year based on its new energy-sipping Core processors (see BW Online, 4/28/06, "Intel on the Offensive"). Intel spokesman Scott McLaughlin took the news in stride: "We appreciate that Dell continues to show strong support for the bulk of our product offerings and shows strong belief in our roadmap," McLaughlin says. "From our standpoint, we hustle and work hard to win every piece of their business."

Analysts were less sanguine. "This is a major blow to an already staggered Intel," says Technology Business Research analyst Martin Kariithi. "Dell is the company's largest customer, accounting for almost one-fourth of Intel's processor shipments per quarter."


  Speculation that Dell would adopt AMD had increased, then fallen off in recent months after Dell executives issued conflicting statements on the matter. Negotiations between the two began heating up late last year, sources close to the matter say, with AMD holding out for adoption of its chips in high-volume products. The two remain in talks about adopting AMD chips in other areas, one of those sources told BusinessWeek.

AMD's Seyer noted that most other customers who have adopted Opteron and have a PC business later pick up the company's AMD Athlon 64 desktop or Turion notebook PC chips. "I have yet to work with a partner who starts with one Opteron part and doesn't expand into other areas," he said.

With Intel struggling to be more competitive against AMD, the news should serve as a wake-up call to the company's rank-and-file that AMD has gained not just a foothold in the industry but a permanent place at the table. Intel plans an offense in the second half of the year. It had better be a strong one.

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