Inside Intel's Price Cut

Analysts are parsing Intel's moves, speculating its intent may be to create problems for AMD before the launch of Barcelona, its new chip

With perhaps a month to go before launch, the next big computer chip remains a bit of a mystery, and so every shift in strategy by longtime rivals Intel and Advanced Micro Devices is being teased for hints of the battle to come. AMD has yet to disclose the performance specifications for its new chip, code-named Barcelona, which may help explain why what might otherwise seem a routine price cut by Intel is spurring anxious buzz: Perhaps Intel is conceding it may soon no longer lay claim to the dual title of biggest and fastest.

Intel (INTC), said to be cutting prices as much as 50% for its premier Core 2 Duo line for high-end computers and servers, no doubt expects to find a newly reinvigorated rival nipping at its heels, if not outrunning it, as early as next month. But cutting prices is a move chipmakers make on a regular basis, and one that analysts say Intel's customers have known about for months. "It always comes down to this: The one who has the best-performing chip in a given segment gets to charge the most," says analyst Nathan Brookwood, head of Insight64, in Saratoga, Calif. "The one who doesn't offers discounts."

But if that's the case, the cuts may indicate that Intel doesn't expect to have the fastest chip once Barcelona launches and has planned to cut prices accordingly. "There was a period up until about a year ago that AMD had the performance lead, and so Intel had to slash prices on its Xeon chips just to sell a few," Brookwood says. "AMD didn't have to respond."

Back and Forth

But those days are gone, and have been for about a year. AMD (AMD) has been muddling through a nasty downturn that had a lot to do with misjudging demand in certain sectors of its market, thus ceding some market share territory it had only recently grabbed from Intel. But AMD has been bouncing back from the worst of its troubles, having just landed a deal to supply chips to Japanese laptop maker Toshiba, a longtime Intel-only shop (see, 5/30/07, "In Switch, Toshiba Buys AMD Chips").

Meanwhile, hopes are riding high at AMD that Barcelona will get it back in the competitive saddle against Intel, which has been exploiting AMD's relatively weak execution with its customary aggressiveness. Having landed several large PC makers as new customers in the last year to 18 months—the biggest of which is Dell (DELL)—AMD found itself struggling to meet the needs of smaller PC makers who buy its chips from distributors like Arrow Electronics (ARW) and Avnet (AVT). This so-called channel business, long an AMD strength, suffered as the company focused its resources on Dell, Hewlett-Packard (HPQ), Gateway (GTW), and others, leaving an opening that Intel was all too happy to exploit.

Intel's true intent may be nothing more than to create problems for AMD ahead of the Barcelona launch by lowering the price floor. If AMD's chip outperforms Intel and reclaims the top performance spot, then Intel's cuts are only slightly harmful. But if AMD's chip doesn't meet expectations, then AMD would have to make price cuts of its own when they would hurt the most. "When Intel gets a cold, AMD gets pneumonia," Brookwood says.

A Question of Timing

An Intel spokesman didn't answer direct questions about the reported cuts but says that it's not uncommon to reduce prices to clear inventory in advance of incremental upgrades to the product lineup like those slated for the near future. Intel never confirms price cuts before they're officially announced, but its customers get an early look at pricing plans before they're put in place for planning purposes.

One important question is whether AMD will deliver the Barcelona chip on time. Eyebrows went up last week as supercomputer vendor Cray (CRAY) warned that it would miss its previously stated revenue forecast, due in part to a shortage of a key component thought to be an AMD chip. Brookwood says the chip in question is code-named Budapest, which is related to Barcelona. Budapest is used only in one-chip systems, whereas Barcelona is expected to be used primarily in systems using four or eight chips, and as such requires more rigorous quality testing before it's shipped.

"Why it's harder to ship a chip that should be easier to test beats me," Brookwood says. The slip on Budapest may hint that Barcelona could be late. An AMD spokesman confirmed a schedule change on the Budapest chip, but said that there have been no delays in customer product launches to suggest any delay in Barcelona. "We don't launch until our customers are ready to go with products that are using our chips," says spokesman Phil Hughes.

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