Intel Breaks AMD's Business Model

It is becoming more apparent that AMD's days as an IDM are numbered.
Forbes:
"Covello told clients he upgraded his rating (for Intel) because AMD's likely move to an outsourced business model will create significant benefits for Intel over the longer term."

An increasingly larger chunk of AMD's volume is no longer generating enough margins to warrant in-house production. Thanks to AMD's price war and failed campaign to grab 30% market-share, the commoditisation of x86 processors was accelerated. AMD miscalculated the large performance gap Intel was able to establish with its Core2 generation of processors. Along with its cost advantage, Intel managed to protect itself from AMD's scorched earth strategy of flooding the market with sub-$100 processors.

Intel understands the danger of having a significantly sized competitor which is why it is determined to continue to put the hurt on AMD. Intel's planned price cuts next month shows its willingness to sacrifice margins in the short term to deny AMD the financial means to expand its in-house manufacturing capacity. In fact the strategy worked so well that Intel even managed to deny AMD the financial mans to run 2 Fabs on a day-to-day basis.

AMD's earning projection shows red until the end of 2008. In order for AMD to survive, it needs to outsource. You can mark this down as the beginning of the end for AMD. No semiconductor company has yet to return from outsourcing. Commoditisation doesn't allow it. Talk about shooting yourself in the foot.

Eye of the Storm Explanation Indeed

I thought I found Scientia’s title for his latest blog very appropriate, the "Eye of the Storm". This is usually used as a metaphor for a brief respite which normally leads to a false sense of security. I had an impression that he was trying to give an explanation about AMD’s current Barcelona problems but as it turns out, his explanation was even more chaotic than reality. The trouble with Scientia’s blog has always been his position in the Intel-AMD debate. And because of his desire to defend the indefensible, stretching the imagination in the style of Sharikou is becoming a necessity for him. Either that or he really doesn’t know what he’s talking about.

Take for instance when he wrote:
“…We know that AMD first demonstrated Barcelona November 30, 2006. This was presumably a stable Alpha chip. The earliest Conroe's were also Alpha chips and we know that it took Intel about six months to go through two revisions to get to the B1 release version. However, we also know that Intel's B1 had a minor bug that was fixed in the B2 revision, so B2 is also a reasonable assumption for production. We know too that the fastest that AMD could run off inline test chips would be 10 weeks. So, if we project this from the November 2006 demo we get:
November 30, 2006 – Stable Alpha silicon demo
February 8, 2007 – B0
April 19, 2007 – B1
June 28, 2007 – B2 (originally intended launch?)”

The alarming number of errors on this paragraph alone is giving me difficulty in trying to determine which one I want to start with. The most erroneous assumption Scientia made is his idea that silicon stepping is a standard measure that can be used as a benchmark. And what is even worse is he applied this benchmark to make a prediction for another company. What Scientia obviously doesn’t understand is that silicon stepping is a relative designation. It’s created for marketing with the purpose of creating distinctions between product/process revsions. A change in the letter signifies a major change while a change in the number is a minor change. B2 stepping doesn’t mean “launch ready”, it just means it had a minor change from B1 stepping. You have to go and read the documentation to understand specifically what was changed. It never is the same for any step for any product, let alone between Intel and AMD. To claim that Barcelona will launch at B2 just because Conroe did is the pinnacle of Scientia’s naivety.

And since we’ve established that the beginning of Scientia’s blog is grossly inaccurate I don’t see any reason to continue just to point out his mistakes. Besides, I’m not a fan of wearing down readers with lengthy posts.


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Update1: AMD’s Presence in Workstations Plummets in Q1’07 - John Peddie Research
Vendor - Q2CY06 --- Q4CY06 - Q1CY07
Xeon ----- 86.7% ------ 88.9% ---- 92.0%
Opteron --- 3.3% ------ 11.1% ----- 8.0%
It looks like Intel made a brilliant move to offer Quad-core conquering the workstation segment while the competition is struggling to keep up. Once again it shows how time-to-market is key.

No Barcelona in 2007

It looks like we'll see Penryn out before Barcelona.

http://www.fudzilla.com/index.php?option=com_content&task=view&id=1351&Itemid=1 I

UPDATE1:
I hope the FUDZILLA haters can forgive me now with these additional links:
The Inq
The Tech Report
Anandtech

I can only imagine serious implications for AMD if this rumour is in fact true. The key to any technology business is TIMING. Forget about Cost or Quality. If the timing is off when demand picks up, also known as the "demand curve", the business is lost. The demand curve for Quad Core kicked off 6 months ago when Intel released Kentsfield and Woodcrest. AMD has paid a heavy price in server market share by having nothing to compete in this space when the high end demand shifted to Quad Core.

Delaying Barcelona will surely result to more market share erosion in the short term. But what is more significant long term is the loss of design wins AMD was hoping for this year to sustain its server business. As to the impact of the delay to Barcelona's eco-system we've already seen an example in Cray's fiscal warning. Do not brush of Crays announcement as insignificant. Cray had an axe to grind with AMD as it hedged a significant portion of its business on this product and felt let down. Making an earnings announcement 6 months in advance just shows the frustration it has with AMD's poor execution and this is something you don't see everyday. While a lot of other businesses will surely be losing money as a result of this delay, most of them won't be as vocal as Cray. But I can assure you they are losing money and they're equally frustrated. Hard lessons are being learned here about doing business with AMD... again.

UPDATE2:
I've started writing about AMD's shipping of Radeon 2400/2600 but i fell asleep. That always happens to me with pre-fragged product releases. I only wanted to point out how AMD doesn't do soft launches. I wanted to know how AMD would describe what they just did with R600. If it wasn't a soft launch and definitely not a hard launch, then what exactly is it? I can't wait for the next gobbledygook from Advanced Maker of Doublespeak.

The Barcelona Miscarriage

I’ve started re-thinking my position regarding Barcelona being dead on arrival (DOA). It now looks as if that projection was a little bit too optimistic. One month from launch and AMD cannot seem to come up with a working silicon as per designed. Forget about the initially promised 2.6GHz. It looks like the scaled down promise of 2.3Ghz is also fast becoming an impossibility. AMD today demonstrated a crippled 1.6Ghz Barcelona. I don't think AMD can even make Barcelona work!

You’d think AMD won’t be stupid enough to reveal just how badly broken their process so close to launch but it appears AMD has become desperate. They forced Supermicro, MSI and Tyan to demo a server that shows its industry leading ability to boot up. If you’re a product engineer you know that these half-alive CPUs are production rejects, but AMD badly needs to demo something. I can easily imagine AMD product engineers foraging through their rubbish bins filled with tons of dead Barcelona trying to look for one that can at least boot up. It’s refreshing to know they at least found 3 for the Computex demo.

And since these are rejects, the result of the demo weren’t surprising: Barcelona shows to only match the performance of K8 while at the same time being trashed by the soon to be replaced 65nm Xeons. AMD’s promise of better performance at the same clock frequency seems achievable considering 1.6Ghz is all it can muster.

Typically technology certification demands that yield targets are met 6 months before launch to allow enough time to build inventories. AMD requires 15 weeks to build Barcelona from wafer start to device shipped. If AMD were to launch Barcelona in 7 weeks time (July) and the best they can show right now is a 1.6Ghz CPU, I can only see disaster. Delay the launch or ship a broken product. Neither one will be good for AMD.

Meanwhile just across the hall, Intel demonstrates its V8 system with 45nm Penryn at 3Ghz:
The rumoured Barcelona performance in a 4x4 config could only muster ~16K. That is of course on paper. Let's wait and see if AMD can actually make the damn things first.

AMD Brings Down Another Customer - Cray

From Forbes: "Cray recently became aware that there has been a delay in volume parts availability for a key component of the quad-core XT4 until later in (the fourth quarter)," wrote Northland Securities analyst Chad Bennett in a note to investors. "We believe the most logical key component is the quad core processor from Advanced Micro Devices Inc. (nyse: AMD - news - people )".

Be it Barcelona or just the old K8 Opteron that's going to be delayed, it doesn't matter. AMD has let down another customer by not meeting the committed volume. If it is Barcelona that is delayed then we can assume that the rumours of process issues are most likely true. But if its Budapest that's delayed, we can also assume that AMD's mistake of loading its tiny Fab with the large die Barcelona is finally affecting its overall Fab capacity and its ability to meet promised volume. You can look at it anyway you want, the bottom line is AMD is reinforcing its horrible reputation as an unreliable supplier with its already unprofitable business platform.

Dell, Sun, ATI and just about anybody on this list knows exactly what I'm talking about. Sun has learnt its lesson of the dangers of relying solely on AMD. Expect a Crey-Intel announcement in the coming months.

Analysis of a Privately Owned AMD

We’ve heard the rumours from several sources that AMD is being targeted for a private equity buyout. While most people have negative associations with corporate takeovers, this doesn’t necessarily mean a bad thing for AMD. Current global market conditions have allowed private equity investments to flourish, making it easy to raise large sums of cash at favourable rates. The general idea is to buyout an undervalued public company, take it out of the stock market, re-invest, increase its value then sell when it matures. AMD today is perceived to be undervalued relative to its capital and revenue potential. I am aware that AMD is predicted to be in the red for the next 2 years, but bear in mind that future earnings for the next 2 years are not as important in a privately held company as if it was publicly owned.

Privately owned companies do have several advantages which can benefit AMD. One that quickly comes to mind is the absence of restriction and influence of the media and the stock market in making business decisions. Management can make huge and risky decisions like build or decommision a Fab without the pressure of stock market fluctuations and negative valuation. AMD needs this at the moment as their current business model doesn’t seem to generate enough revenue to turn a profit for the next several quarters. AMD needs a major overhaul.

Another advantage privately owned companies have has something to do with the quality and effectiveness of the management. The CEO’s compensation terms are never publicly declared in a PE company. This allows the new owners to select the best people to do the job. Top level management can also be compensated generously in proportion to financial performance. The scrutiny of investors, the board nor the financial governing body does not exist in such internal affairs. The absence of publicly reporting financial results relieves CEO’s from the time consuming tasks of managing investors and the media. This leaves the CEO to focus 100% of its time to improving the company.

The timescale to improve is definite and relatively short-term. The goal of creating value for the private equity owners in the span of 3-5 years drives quick and drastic changes. Major changes that publicly owned companies wouldn’t be allowed to do without the lengthy investor consensus or board approval. In the last few quarters AMD spent a lot of time media massaging and creating PowerPoint presentation just to calm investor anxiety. The benefits of focusing only on solving internal issues are obvious.

There is one critical disadvantage for AMD if it goes private and it has to do with its long term survivability. Private equity investors typically sell the company once the rate of return on investment reaches it peak. This is typically within the 3-5 year window and for a microprocessor company, this is pretty much short-term. The main objective why PE funds engage in such activity is obviously to make money. Heavy R&D investments for future products 5 to 10 years down the line may not hold special interest to PE owners as these are long-term spending which doesn’t necessarily add value to the company at its present state when it is time to sell. This doesn’t mean that there will be absolutely no spending on R&D. It just means that it is safe to assume that Intel will care more about its long term future than a privately owned AMD which hopes to sell the company in a few years. Generally, PE investors focus on optimising mid-term value gains which in some cases have detrimental impact to the long term viability of the company.

As it stands today, AMD’s long term survivability is in danger anyway so a private buyout should be welcomed. This is the biggest reason why AMD’s stock has been slowly climbing. A PE buyout normally pays a premium. Being owned by a private equity with a bottomless cash supply should allow AMD to transform into whatever it needs to and as quickly as it wants to. For the industry watchers this can get a bit dull with AMD having less interest in public hyping. Focusing more on making money rather than gaining popularity.

AMD: X2300 Mobility Radeon Works Best With Core2Duo

It appears like AMD has found a better way of selling its mobile graphics processors... and its not using their own mobile CPU. AMD's dilemma in the mobile space is quite obvious. Turion + X2300 does not a high-end laptop make. The niche market that x2300 was designed for is securely controlled and by Intel's mobile C2D. At the end of the day, i guess it's all about making money.
AMD's link: http://ati.amd.com/buy/promotions/asusa8jr/index.html

If you're an die hard AMD fan, don't be annoyed just yet because it seems that according to AMD: "Intel Chooses ATI’s Radeon® Xpress 200 Integrated Chipset" in one of its Motherboards.

Where has pride and dignity in the industry gone to these days?