A Chip on His Shoulder
When Trek Bicycle senior designer Michael Sagan was modeling Lance Armstrong's bike in 2000, he spent more time working from home than at the office. His personal computer, powered by a chip from Advanced Micro Devices, ran his design software applications more efficiently than the Intel-based computers at the office, and he got more done at home. By 2003, AMD had formed a partnership with Armstrong's team, and today more than a dozen Trek designers and engineers use AMD-powered computers to create virtual wind tunnels to test and reduce drag on racing bikes. "With AMD machines, we've seen our design-cycle times come down by about 50 percent," Sagan says. The computers at Trek are being used for graphics, Web and industrial design, and mechanical engineering.
AMD may be the biggest little chip company you've never heard of, and it is desperately trying to change that image. The Sunnyvale, Calif., company has been a distant second behind semiconductor behemoth Intel since the early days of computing. The two companies compete to build the internal brains of computers--the microprocessors that power the math, word processing, and graphics. Intel commands a dominant 82 percent market share in terms of units sold, with AMD as the only other noteworthy competitor. Intel has a $148.6 billion market capitalization, dwarfing AMD's $9.9 billion.
Intel and AMD have a storied past, and their rivalry is only getting uglier. In April 2003, AMD released the Opteron chip for servers, which analysts praised as cheaper and faster than Intel's offerings. Since its launch, AMD has gained share in the server market--during this year alone it jumped from 7.4 percent in the first quarter to 11.2 percent in the second, according to Mercury Research--and Intel has still not released a comparable chip. Then in June, AMD sued Intel for allegedly violating antitrust laws, while launching a media campaign to raise consumer awareness about what it claims are bullying tactics by Intel. Intel denies any wrongdoing.
At AMD's helm is CEO Hector Ruiz. A 59-year-old Mexican immigrant with a Ph.D. in electrical engineering, Ruiz spent 22 years climbing the ranks in Motorola before coming to AMD in 2000 and then ascending to CEO in 2002. "Internally, people say we've turned the company upside down," says the soft-spoken Ruiz.
The 64-bit Opteron processor was unique in its ability to allow systems to run both newer 64-bit software applications and older 32-bit models, which means companies don't have to upgrade their entire systems at one time. In April, AMD launched a version with two processors instead of one. Intel plans to launch a competing dual-core processor for servers later this year.
Moving on. AMD is trying to leverage the market bang it got from Opteron beyond servers--the large boxes that hum inside corporate closets, processing and storing massive amounts of data generated on corporate networks--into the corporate desktop market. Intel dominates this business in partnership with PC giant Dell, which uses the semiconductor giant's chips exclusively. But AMD hopes technology managers who are pleased with the performance of servers powered by its chips will influence purchasing decisions when it comes to desktop deals. "I decided the only way we were going to compete was to go at the belly of the beast--the [corporate] enterprise market," Ruiz says. "There is huge opportunity, considering we are starting at zero."
AMD hopes its partnerships with computer makers Hewlett-Packard, IBM, and Sun Microsystems will help it win new business. Recent successes in the server market include Unilever, 7-Eleven, and Airbus. AMD has made inroads into the corporate desktop market with deals with Northeast Utilities and the U.S. Air Force. "Many of the 64-bit products were in the latter stages of development when Ruiz took over, so he was being dealt a reasonable hand," says Nathan Brookwood, an analyst and consultant in the semiconductor industry for Insight 64. "He played it well."
AMD has also had success in the consumer market with its Athlon chips, which power notebooks and desktops made by the likes of Gateway and HP. But it's a tough slog: Dell's reliance on Intel limits how much headway AMD can make. Intel's relationship with Dell and its highly successful "Intel inside" marketing strategy are targets of AMD's antitrust complaint against Intel. Many in the industry question whether AMD has the manufacturing capacity to compete against Intel should Dell decide to throw it some business, but Ruiz insists the company would find the capacity if it needed to. "We cannot ignore them, but they've chosen to ignore us based on a series of financial incentives," says Henri Richard, AMD's chief sales and marketing officer.
The alleged financial incentives are detailed in AMD's complaint, which Intel adamantly denies. The federal court filing is a lively read, giving one example after another of how Intel purportedly bullies computer makers, distributors, and retailers into excluding AMD from deals. In all, it mentions 30 major players in the computing world and quotes several high-profile industry executives. It argues that Intel's tactics have prevented AMD from winning business in spite of its competitive products.
Intel countered last month, filing an answer to the complaint in which it denies the bulk of AMD's allegations and insists it operates within antitrust laws. It says AMD is to blame for its own low market share. "AMD's position in the marketplace reflects nothing more than the choices AMD has made and its track record with its own customers," Intel writes. Intel spokesman Chuck Mulloy says it is merely competing. "AMD has a very competitive product, and the market has responded."
AMD's antitrust action is not the only one Intel faces. Earlier this year, Japanese authorities charged Intel with violating antitrust laws, which Intel did not dispute. In addition, the European Commission and South Korea are investigating Intel's practices. "There is growing international concern," says Chuck Diamond, who represents AMD in the case. In addition, more than 60 class action lawsuits have been filed, mostly in California and Delaware.
While some industry insiders perceive AMD's suit as merely a vehicle to raise consumer awareness about its products, others see it as a viable lawsuit. "This is the best-written complaint I have read in an incredibly long time," says David Balto, a former policy adviser for the Federal Trade Commission who is not involved in this case. "I think even if they are in front of a conservative court, if they can prove their allegations, the court will be sympathetic."
A tough sell. In the meantime, AMD is continuing to put pressure on Intel in the marketplace. Last week, it announced faster models of the dual-processor Opteron, on the same day Dell announced it would ship the first servers with Intel's yet-to-be-released version of its own dual-core processor later this year.
But even with the edge AMD continues to have over Intel in certain critical technological areas, Wall Street remains skeptical about AMD. Earlier this month, Merrill Lynch analyst Joseph Osha downgraded its stock and upgraded Intel's because, in spite of AMD's recent gains in the server market, Intel's increased pressure is likely to have an effect on AMD in the next year. JPM organ analyst Christopher Danely recently reiterated an "underweight" rating on AMD stock. "In spite of the upside, we remain concerned with the company's historically spotty execution, increasing operating expenses, increasing inventory, and the potential for processor overcapacity in 2006," Danely says. But AMD investors should be more pleased than Intel stockholders. During the past six months, AMD's stock has shot up nearly 50 percent while Intel's price has gained less than 10 percent.
The overcapacity question stems from the opening of a new manufacturing plant in Dresden, Germany, which will sharply increase AMD's chip production. The new facility will provide a welcome relief from AMD's current plant, which is maxed out, but the company does not currently have enough orders to use both facilities at maximum capacity.
Wall Street is also worried about the pending spinoff of AMD's Spansion business, which manufactures flash memory products mostly for mobile devices such as cellphones and digital cameras. AMD owns 60 percent of Spansion in partnership with Fujitsu, and it filed papers with the Securities and Exchange Commission for an initial public offering back in April. A slowdown in the flash business put a damper on its prospects for investors, and the spinoff remains in limbo. The division represents 40 percent of AMD's total sales, but its costs have become a drain on the company's income statement. In the second quarter, AMD eked out a small profit that would have been substantially bigger were it not for the Spansion unit, which lost $90 million.
But mostly AMD can't seem to shake off its history. The company was embroiled in litigation with Intel through the late 1980s. Each technological advancement AMD made was matched or surpassed by Intel in little time. "Because of AMD's past inconsistent performance, many analysts have been burned," says Brookwood. "Some see [AMD's current success] as a streak of good luck and eventually the natural order of the universe will return." But don't tell that to Ruiz. "It's irreversible," he says of AMD's recent progress. "We've been able to make inroads, and we've forced our competition to follow suit. There has been a huge change."
Perhaps, but as Lance Armstrong knows well, the competitor with the yellow jersey on in the middle of the race won't necessarily win.
This story appears in the October 10, 2005 print edition of U.S. News & World Report.