Intel Starts to Push Back
Having endured market share losses and smart-alecky marketing messages from its archrival Advanced Micro Devices (AMD), Intel (INTC) looks ready to roar back. An early shot in Intel's new offensive was fired today at twin events in San Francisco and New York City, where the company debuted its Xeon 5100 chip for servers. The new chip is seen as strategically important not only to Intel's business, but also to its perceived role as the leading innovator in the chip industry. AMD has scored a string of key victories in recent years with its Opteron server, which many customers say is fundamentally different from—and by many measures better than—competitive Intel chip designs.
Here's why: For years each company sought to beat the other in a sprint to see which one's chips could run fastest. But then AMD switched to a new design philosophy aimed at getting computing work done more efficiently. AMD's chips also have paid a closer eye to power consumption. The more power a chip consumes, the more expensive it is to run, and the more difficult to cool. AMD's power-consumption advantage has been the source of a marketing push by AMD to make light of its competitor (see BusinessWeek.com, 5/3/06, "AMD Sticks It to Intel—Again").
A LEADER'S LOSSES.
The switch worked, and Intel suffered. In the first quarter of 2006, AMD's share of the server market was 22.1% vs. Intel's 77.9%, according to Mercury Research, a chip industry research firm. While Intel still has a sizable lead, its share a year ago was closer to 93%, while AMD had a mere 7%.
Last year marked a turning point, says Mercury Research's Dean McCarron. While AMD's Opteron chip had been on the market for about three years, customers buying new servers didn't start turning to AMD-based systems from companies such as Hewlett-Packard (HPQ) and IBM (IBM) until 2005. The momentum continued in 2006, when Dell (DELL) switched from being an Intel-exclusive vendor to including AMD chips in its servers. "The server business is a very slow-moving market compared to other segments of the computer industry," says McCarron. "The very best product on the market might very well eclipse others, but the change won't show up in the market share data for several quarters."
Intel has been under pressure to get back in the game for some time. In the meantime its stock price has suffered. It closed Monday at $18.28, down more than 36% from its 52-week high set in July, 2005.
XEON VS. OPTERON
So how competitive is the new Xeon with AMD's Opteron? Intel is claiming performance that is 71% better than AMD's and an 84% improvement over AMD's power consumption. "This is undeniable leadership," says Tom Kilroy, vice-president and co-general manager of Intel's Enterprise Group. "We're back. We're back to a position we're used to having—and that is really undeniable leadership in terms of performance." Kilroy says 150 server manufacturers have already signed up to take the chip.
During the presentation, Intel ran the now-standard comparison test against AMD's highest performing chip, handily beating the system in a speed test. And in a jab at AMD execs, who handed "kill-o-watt" meters to analysts at the outfit's recent technology day, Intel execs used the same device to measure the new Xeon 5100 system's performance—gauged to be 7 watts better than that of the AMD-based system.
That said, the results are skewed by the fact that Intel is producing chips using the 65-nanometer process, vs. AMD's 90-nanometer process. Typically, as more chips are packed onto smaller dies, performance improves dramatically. AMD is not scheduled to begin building chips on a 65-nanometer process until later this year.
NEW BATTLE BREWING?
Don't just take it from Intel. In a June 22 research note by Thomas Weisel Partners, Eric Gomberg said that, in the firm's own benchmarking tests, Intel's power consumption was "lower than expected," and was also lower than comparable systems running AMD chips. "This is going to make AMD's life more difficult than it has been in the last two years," says analyst Nathan Brookwood, head of Insight64, a Saratoga (Calif.) consultancy. "If AMD can respond to this within a relevant time frame, the customers it has recently won may stick with it. If it can't respond with something that can provide the same level of performance and excitement, it could be very problematic."
When the two competitors are once more on equal footing in terms of production technique, the battle for performance leadership will again be up for grabs. And that means a new battle is brewing that can't help but push prices down. BusinessWeek.com has learned that as part of the continuing reorganization of the company, expected to wrap by late August, Intel Executive Vice-President Sean Maloney now oversees all product pricing decisions.
The company plans to use more aggressive pricing to lure customers back to the fold. Steep cuts on desktop and notebook parts are showing up at retail outlets, with some systems only recently introduced already selling with $150 markdowns at the register. In addition to combatting weakened consumer demand with his new pricing strategy, Maloney also aims to win back retail business that AMD had claimed for its own. On the business front, the Xeon server chip introduced last May is now being positioned as a value chip to win over many small and midsize business customers that AMD claims are flocking its way.
"NOT JUST ABOUT THE CHIP."
In negotiations with big-name customers, Intel also appears prepared to make price concessions to win more system designs than AMD. That sets the stage for what could turn into an all-out price war. "These chips tend to have high price tags and high margins," says Mercury's McCarron. "This is going to change the pricing dynamics. We simply haven't seen server chips sold below a few hundred dollars a unit, but now we're seeing them sold at less than $150. It's a different world than it was a few years ago."
Meanwhile Intel is seeking to deflect attention from the direct chip-to-chip comparisons to focus as much as as possible on overall system performance. In his presentation, Kilroy stressed the point no fewer than 10 times that Intel is working to reduce companies' overall cost of ownership with its platform approach—integrating the microprocessor, chipset, motherboard, and other components into a single product. "It's not just about the chip, or the chipset, it's about the whole platform," he said.
The company trotted out some big-name customers, including BMW and Disney (DIS) unit Pixar—in an apparent answer to AMD's relationship with DreamWorks Animation (DWA) —to demonstrate customer interest in the new chip and further development efforts.
SERVER SPACE SQUEEZE.
Greg Brandeau, vice-president of technology for Pixar, stressed a growing problem for many server customers: They require ever-more computing power but have a limited amount of room for expansion in their current server workrooms. Many do not have room to build additional space in the same building and don't want to spend the time and money to find expensive new real estate.
AMD has capitalized on the problem in the past couple of years, with companies such as DreamWorks and Google (GOOG) swapping out Intel-based boxes with better-performing, energy-sipping AMD systems. Brandeau said Pixar will remain a loyal Intel customer because the Xeon 5100 delivers about 30% better performance at rendering images for movies such as Cars, while using less than half the power.
Aside from server chips, Intel has additional products set to launch before the end of the summer, including a new version of its troubled Itanium server chip line, and new chips aimed at desktop and notebook computers. And that's going to mean a renewed marketing push going into the fall season, when back-to-school and holiday sales are paramount.
SHARING THE PAIN.
AMD's success has also hurt Intel's relationship with mainstream desktop and notebook makers. Japanese notebook maker Toshiba (TSBF) is known as an Intel-only operation that hasn't used an AMD chip in its lineup in recent memory. Hurt by AMD's success in notebooks sold at retailers such as Best Buy (BBY) and Circuit City (CC), some U.S.-based Toshiba executives favored adding AMD chips to the product lineup, which would have ended a long and exclusive strategic partnership.
At one recent meeting, Toshiba executives were quite blunt, says Mark Simons, general manager of Toshiba America Information Systems, the company's U.S.-based unit. Toshiba executives confronted Intel with possibility of a shift. "We explained our logic to them. And I think hearing what we had to say, as well as what they heard from others helped them recognize they had some fundamental issues," Simons says. "And to Intel's credit, they have responded."