AMD faces tough battle against Intel

SAN FRANCISCO (Reuters) - Advanced Micro Devices Inc (AMD.N) is risking falling afoul of Moore's Law and slipping further behind Intel Corp (INTC.O).

For decades, the semiconductor industry has lived by the 1965 observation of Intel co-founder Gordon Moore that the computing power of semiconductors doubles roughly every two years. Intel has kept up, but now some say AMD can no longer keep pace as it has fallen behind a manufacturing generation and its chips aren't as speedy as Intel's.

"If you're not keeping up with the rhythm of Moore's Law, and I don't think AMD is, you're going to continue to lose money and market share," said Hans Mosesmann, an analyst with Raymond James & Associates.

AMD lags Intel, the No. 1 chipmaker, in chipmaking technology and could be about nine months behind Intel when it introduces chips with elements as small as 45 nanometers in the second half of 2008, analysts said.

Smaller features of chips allow Intel, AMD and other chipmakers to get more computing performance out of a single chip at the same or lower power consumption levels.

AMD's revenue share of the microprocessor market fell 17 percent to $4.3 billion last year while Intel gained 8 percent to $25.9 billion, market research firm iSuppli said. Intel ended 2007 with 79 percent revenue share of the microprocessor market and AMD closed out the year with 13.2 percent.

"They started falling behind at 65 nanometers, and they're trying to make the transition to 45 nanometer," Mosesmann said. "If they can't get 65 nanometer to work, what says they can get 45 nanometer to work?"

2007 was a tough financial year for AMD, which is based in Sunnyvale, California. It had a year-end net loss of $3.38 billion, which ballooned from a net loss of $166 million in 2006. Intel's net income rose to $6.98 billion last year from $5.04 billion in 2006.

Part of AMD's problem in 2007 was a delay in volume sales of its much awaited processor, code-named Barcelona. It was aimed at the market for computer servers, which form the backbone of corporate data centers.

Analysts say AMD has fixed a technical problem with that chip, and that volume production is ramping up.

Mosesmann said AMD's average selling price (ASP) of its chips has also declined. For instance, the price range of AMD's desktop processors is $68 to $251, a decline of 65 percent in a year for the high-end processors. Intel's desktop price range is $64 to $999.

AMD's future may hinge on its manufacturing strategy, whether it builds its own $3 billion factory with the latest chipmaking technology or adds capacity by striking a deal with an Asian contract chipmaker to use its factories. A partnership would boost capacity without saddling it with the cost of building its own plant.

Analysts expect an update from AMD on its manufacturing plans in the second half of this year.

New markets where cost is an issue are prime for AMD because its prices are low relative to Intel in most cases.

"Their products are very well suited to emerging markets," said CRT Capital Group analyst Ashok Kumar, noting that AMD's average prices are about half of Intel's roughly $125 each. New markets include Brazil, Russia, India and China.

Also in AMD's favor is PC makers' reluctance to rely on a single supplier for its microprocessors, and that would go a long way toward keeping AMD around, Kumar said.

"AMD is going to survive for the very simple reason that the (PC makers) will not want to go back to an era where Intel has a license to print money," Kumar said.

AMD LOOKS TO SECOND HALF

AMD has said it is on track to move to volume production of 45-nanometer chips in the second half of 2008 and samples are now available.

"It's a large risk because Intel is doing so well," said Cody Acree, an analyst at Stifel Nicolaus, of AMD's move to 45-nanometer technology. "If you don't execute the turn correctly, then you don't have the cost flexibility that Intel does at the same gross margin."

Intel, which had more than six times the revenue of AMD in 2007 and a market capitalization that is more than 30 times AMD's, is already cranking out 45-nanometer chips that are more efficient and powerful than their predecessors.

Intel stumbled badly more than two years ago when its then-dated Pentium processors fell behind AMD's Athlon and Opteron chips. But Intel got back on track when it moved to its Core microarchitecture design in 2006.

"Intel obviously is doing very well," said Insight 64 analyst Nathan Brookwood. "They are executing like a well-oiled machine, and AMD certainly in 2007 executed like a rusty old machine."

AMD will also have to contend with Intel's forthcoming processor code-named Nehalem, due for production in the fourth quarter. They can be made with two to eight cores, or electronic brains, and promise better performance at digital multi-tasking.

"It certainly does look like a formidable competitor," Brookwood said.