Intel's Monopoly Profits

What do you do when your marketing department doesn’t have any appealing product to promote? One option is to spend your advertising money attacking the competition. At least for AMD, they believe this is a wise thing to do. It's hard to blame them when the slogan "best value" doesn't really appeal to anyone. The latest “Intel is a monopoly” assault from AMD came in the form of a report from one of its financial consulting firm cleverly disguised as an independent economic report. The bottom line is that AMD paid Dr. Michael Williams to make a supposedly damning case against Intel so it is hard to put weight on this study. But it makes for an interesting read if you're the kind that likes to read stories you already know how it ends.

To sum up the report, it says that Intel has profited ($60B) from its dominant position since 1996. AMD and ERS prefer to describe Intel's profit during the intense growth years as "monopoly profits". Nevermind the fact that Intel was trying to supply a rapidly expanding internet while AMD was busy reverse engineering Pentiums. The free market economy has a built in system that rewards ingenuity and leadership. Is AMD and ERS trying to convince us that making healthy profits from a technological or financial advantage is illegal? The idea that dominant companies should be stifled and disadvantaged sounds exactly the opposite of what free and open competition should be.

The ERS report continues to say that consumers and computer manufacturers will save $81B over the next decade if the gates of free competition are opened. The report appears straightforward enough and makes an awful lot of sense from an economic theory point of view. Free market competition does benefit the consumers. But that theory does not address the simple fact that AMD and Intel is a duopoly in the PC microprocessor market and that there are economic and technological barriers that prohibit anyone from competing. The quick entrance and exit of Transmeta can only demonstrate the likelihood that there won’t be more than 2 (significant) players in this industry.

To some degree it will never be a truly free market as supply creation is limited to a few players. Market forces never really played a primary role in the last several years to determine processor pricing. It was in fact the level of supply Intel was willing to commit capital into and how quickly the PC vendors and suppliers can build systems. The only time the forces of supply and demand kicked in is when AMD built its 2nd Fab where supply outpaced demand. Notice how margins quickly dropped as both companies had no choice but to keep lowering their prices .

But anyone hoping for a free and open competition can only expect disappointment. When Intel stopped offering rebates, AMD started struggling with massive loses and execution problems as it is quite obvious they miscalculated Intel’s response by a long shot. AMD would be an interesting economic case study of how a free and open market destroys a company engaged in business that requires high margins and quick capital turnovers. One can argue that when Intel was making "monopoly" profits, keeping higher margins, it was allowing a poorly managed AMD to survive.

Overall the study is nothing but another attempt by AMD to throw attention at its competitor and away from its failures and missteps. The irony of it all is in fact what AMD was wishing for; a free and open market, is the very thing that is causing them $2Billion in annual loses.


New Economic Study Finds Intel Extracted Monopoly Profits of $60 Billion Since 1996

Also Finds Consumers and Computer Manufacturers Could Gain Over $80Billion from Full Competition in Microprocessor Market

SUNNYVALE, CALIF., August 2 /CNW/ - A new economic study issued today by Dr. Michael A. Williams, Director, ERS Group, found that Intel has extracted monopoly profits from microprocessor sales of more than $60 billion in theperiod 1996-2006. Dr. Williams' analysis explains why pro-competitive justifications for Intel's monopoly profits are implausible. Williams also found that consumers and computer manufacturers could gainover $80 billion over the next decade if the microprocessor market were open to competition. The analysis noted that consumers would save at least $61billion over the period, with computer manufacturers projected to save another $20 billion, enabling them to increase their investment in R&D create improved products and greater product variety; and provide additional innovationb enefits to computer buyers around the world.
The ERS Group is an economic and financial consulting firm retained byAMD's outside counsel, O'Melveny & Myers LLP. - Aha! A Clue.

AMD's Market Share Gains Shows Deeper Problems

The latest numbers from Mercury Research confirms AMD gaining back 4% of the overall PC market share. The report shows AMD at 22.9% in Q2 2007, up from 18.7% from the previous quarter. Intel moved down to 76.3% from a high of 80.5% last quarter. All 3 segments (mobile, desktop and server) showed double digit growth from the previous quarters for not so clear reasons:

"The market demand in general was pretty strong and to be honest, no one understands why this particular second quarter was this strong," said Dean McCarron, founder and principal analyst for Mercury Research. "All the indications were for a low forecast and this quarter just blew those forecasts away."

McCarron continued to explain AMD’s inventory in Q1 and the unusually lows market share figures:

"Basically, AMD had an overstated share in the fourth quarter and an understated share of the market in the first quarter," McCarron said.

I hope this ends the discussion. AMD initially admitted to the problem and now Mercury Research corroborates with my theory. Between AMD and Mercury, I don’t think there is anyone who is more credible so we’ll leave it at that. (Those who were in vehement opposition need not worry because I promise I will not say “I told you so!” ;)

Going back to the market share report where it proves that AMD did maintain some of its previous gains, on the surface this represent good news for AMD. AMD wanted to increase mindshare and market penetration and this somewhat proves that taking back share is never going to be easy for Intel. But there is a fundamental problem that the 4% gain amplifies. If AMD was shipping at record volumes and at a market share of 22.9% on an exceptional quarter, then what would it take for AMD to return to profitability? 30% market share on a miraculous quarter? This is as good as a quarter gets. The loss of $600M at full capacity only points to a bigger problem and one that cannot be solved by simply producing more. But I seriously think AMD is on a “scorched earth” strategy with complete a disregard for creating investor value. Still, there is no announcement of a business restructure and because of that we can only expect AMD to lose at least half a $Billion every quarter. As for Intel, the amount of market share that AMD continues to hold is very frightening especially if you own shares. It must be very frustrating for Intel to maintain investor interest while at the same time fighting a rival on a destructive kamikaze mission.

AMD's Massive Drop in Graphics Share

The sinking ship seems to have more holes to plug than AMD can poke fingers at. The former ATI division not wanting to be outdone managed to show an equally depressing performance of lower revenue, lower ASPs and now a significantly smaller market share. I was always puzzled with the terrible results the Graphics and Consumer Electronics (CE) division showed during the last conference call. It's easy to expect that 3 quarters after the merger, a consolidated organisation should be allowing this division to turn a profit. I suppose I have once again underestimated AMD's ability to exceed even my gloomiest expectations.

AMD’s Q2 numbers are now explained by the latest market report from the John Peddie Research.

AMD's Q2' Earning Report:
Graphics -------------------------Jun 07------- Mar 07
Net revenue -------------------------195---------- 197
Operating income (loss) ---------(50)---------- (35)

Consumer Electronics
Net revenue --------------------------85 ----------118
Operating income (loss) ----------(22) --------- (4)

From TGDaily:
According to a report released by Jon Peddie Research (JPR) today, ATI is estimated to have reached a market share of 19.5% in the second quarter of this year, down from 21.9% in Q1 and down from 26.7% one year ago. Nvidia, on the other hand, is listed by JPR with 32.6%, up from 28.5% in Q1 and up from 19.7% last year.

Characteristically, AMD shows us the art of selling less and losing more money. They promised last December that the graphics side of the business would follow market trends and bring the merger into accretion. But then again, they also predicted that they will be growing the CPU business at 2X the growth levels. We all know how that turned out.

Of course, the biggest challenge for the Graphics & CE division is that it is operating at very low margins with 100% of its production already outsourced. With an almost consolidated SG&A, there isn't a lot more AMD can do unless it wants to touch the division's R&D budget which is always a bad idea. AMD is relying on foundries to improve cost by moving to smaller process nodes but these are short term gains. Everybody moves to smaller nodes. NVIDIA is just too nimble now for AMD to compete while Intel is quite happy with maintaining enough IGP’s/chipsets to enable its platforms. AMD needs a re-think of the graphics side of computing, but it seems this is hoping too much for the struggling company. My only advice after their abysmal performance last quarter is similar to their own asset-lite strategy. I think its time for the Board of Directors to start considering outsourcing the entire management team.

AMD's Analyst Meeting

AMD trying to be the next VIA? At least this is the impression I got. AMD seemed to be trying its best to convey the message that performance no longer matters. Sure, they showed a couple of slides and a demo of an enthusiast system that throws off everyone to think that they care about the insignificant niche of gamers and overclockers. But their primary message of focusing on efficiency rather than performance rings louder and nauseatingly repetitive. They keep talking about giving customers choice. How about they start giving their customers something that competes in the high-end segment. Having only "value" products doesn't sound like choice to me.

I can truthfully say that AMD is doing a good job of trying to fool itself into thinking that the desire of the market shifted to performance-per-watt the exact moment they lost the performance crown to Intel. The moment you can tell when the spin logic falls apart is when AMD tried to answer the question about "returning to profitability" in Q4'07. According to AMD, in order to return to profitability they need to improved their top-line (revenue). They keep trumpeting about how unimportant performance is for their customers while at the same time they seem to have forgotten that their company was making healthy profits right when they had the performance crown.

AMD showed some Barcelona benchmarks only to prove once and for all that the game of leapfrogging which they mentioned just a few quarters ago no longer exist. This supposedly next generation Barcelona core is only as good as Intel's 2.66Ghz Xeon. AMD also showed a "demo" of a 3Ghz Phenom with 3 graphics card. But is it really Phenom because I bet you can make that same demo using a 3Ghz Athlon? The lack of a complete suite of benchmarks only strengthens the concerns about the readiness and availability of these parts.

Also presented are AMD's future products segmented into the Fusion, Bulldozer and Bobcat platforms. While it was interesting to see what AMD is planning not only on the PC space but only on the Consumer Electronics segment, I think I can speak for many that we really would like to see Barcelona successfully ramp first. We'd also like to see how AMD survives for the next few quarters before they could talk about things further down the road. Unfortunately, no details were provided about asset-lite. I'm beginning to wonder if it's more like a strategy-lite problem.

Overall, a lot of self-serving and back-patting hype with nothing substantial to address the current problems both in terms of product competitiveness and financial performance. There was a lot of talk about the successes in the past and intriguing products in the future all the while ignoring the big white elephant in the room - $600M losses per quarter. Now with a very boring corporate agenda that is seemingly similar to VIA in terms of offering mostly "value" products, I can only imagine how abandoned AMD's fanatics feel. I haven't seen a single VIA fan out there because there was no reason to be one. What is the point of supporting AMD and its "value propositions"?

AMD's Credit Rating - Is This The Beginning Of The End?

“A major corporate credit evaluation firm today reaffirmed its B-negative rating on Advanced Micro Devices Inc. and warned that the company's debt-rating could be lowered early in 2008 if the semiconductor manufacturer failed to reverse the challenges it currently faces and improve upon its cash flow. A negative credit rating means AMD would have to pay a premium to attract buyers of its corporate bond and further sink the company into debt.“

The banks are getting impatient. There is significance in the timing of this announcement just two days before AMD’s analyst meeting and should be considered a shot across AMD’s bow. AMD needs to announce concrete plans to return to profitability. The statement from S&P’s Rating Services further confirms what we have been talking about in this blog. The first one is about the early signs of impending bankruptcy discussed in this post, which is the erosion of support from the investment community. This is the first clear sign that AMD will soon begin to have difficulties raising cash with reasonable terms.

The second one is about how AMD’s failed expansion led to its current financial deficit. At the heart of this problem are two Fab’s which were initially planned to generate revenues of up to $1500M per quarter to stay afloat. At the moment the shortfall just for the Computing Solutions Group is $321M/qtr. The ATI business is costing AMD another $40M/qtr. There is nothing on the horizon that can allow AMD to generate enough revenue and this is what is making everyone nervous.

"Standard & Poor's Rating Services said in a statement today that it believed AMD's management had not effectively executed the company's turnaround plans and that the company continues to face strong competitive pressures from market leader Intel Corp. even as its cash position remains challenged.

AMD's recently disclosed plan to reduce capital expenditure, explore manufacturing as well as technology process development partnerships and sell some assets could help improve its cash position, according to S&P analyst Bruce Hyman. Even these plans cannot guarantee the company's successful turnabout in a weakening and competitive market, the analyst warned.

"The negative outlook reflects the significant challenges AMD faces in restoring profitability from currently depressed levels, and stabilizing cash flows despite a continued technology lag," Hyman said in the report. "A positive outlook would require reversal of current trends and demonstration that recovery could be sustained.'

S&P said it cut AMD's credit rating on the company's 7.75 percent senior notes due 2012 to B-minus from BB following the release of the "collateral securing" the debt.
The ratings agency noted that AMD's ability to cope with its financial position was eroded partly by its purchase last year of ATI Technologies, an acquisition the company funded in part by paying cash.

AMD "generated about $600 million negative free cash flows in the June quarter, and over $2 billion negative free cash flows in the past four quarters," according to Hyman. "Cash balances stood at $1.6 billion on June 30, 2007. Debt was $5.8 billion. Leverage will rise very substantially in September."

Definitely a very grim assessment of AMD’s position. A negative cash flow of $2B a year is massive and very alarming considering that in 6 months time AMD needs to start purchasing 45nm tools. The rumours about the use of TSMC for 45nm CPU manufacturing doesn’t really sound implausible considering the lack of options AMD has when it comes to spending for the next process transition.

AMD may have gotten away last quarter by throwing around the “asset-lite” buzzword just to ward off investor jitters. But after another quarter of abysmal performance, the time for talk is over. They better have something substantial to announce tomorrow or they’ll find Loan Sharks Inc., to be the only willing creditor in town. I heard that their debt collecting process is known for its ruthless efficiency.

Did AMD Really Improve Last Quarter?

I may have given the wrong impression in my last post. The mixed reception of AMD’s last conference points to a well crafted report from the company’s top dogs with stories of small gains and promises yet come. It if wasn’t for AMD’s analyst meeting just around the corner, I’m quite sure the “asset-lite” teaser wouldn’t go down well for the investors who are anxious for to hear about that major shake up.

AMD’s Qtr-Qtr gain also played a big role in creating a sense of recover. Nobody (except for a few anonymous posters here) seems to be realising that Q1’07 numbers were irregular. Q1’06 numbers were so artificially deflated that any kind of performance from AMD, however poor it may be, is guaranteed to show some kind of improvement. AMD's earnings report from Q4’06 until Q1’07 cannot be used as a meaningful comparison for assessing trends in revenue growth or market share. The numbers from the two quarters are completely muddled up that it is impossible to determine the true run-rate on a quarterly basis. How AMD truly performed is anybody’s guess. And since I’m anybody, I would like to make a first guess.

I think AMD had a very strong motive to make Q4’06 pretty along with the rest of 2006. AMD was applying for a loan around the same time they were feeling the heat from Intel’s Core2. Seeing sharp decline in customer demand is the quite easy to hide within a quarter. It’s possible to imagine that AMD stuffed its customers with around $200M worth of sales with a loose return policy just to hide the ugly truth from potential creditors. Now if we try an normalise the true decline of AMD’s revenue and move the $200M revenue over to Q1’07, here's how AMD’s numbers would look like:

If you look at the alternative numbers, it shows how AMD's Q2'07 gains turn into another decline by moving revenue to where it should be. The point is not whether the alternative numbers are correct, but to illustrate how AMD’s small improvement last quarter is completely meaningless by comparing it to an excessively deflated Q1'07.

AMD Post Q2 Loss

From AMD:
SUNNYVALE, Calif.--(BUSINESS WIRE)--AMD (NYSE:AMD - News) today reported financial results for the quarter ended June 30, 2007(1). AMD reported second quarter 2007 revenue of $1.378 billion, an operating loss of $457 million, and a net loss of $600 million, or $1.09 per share... continue here.

AMD's results shows a good rebound from the previous quarter. None of this comes as a surprise as I've mentioned several times how AMD played with its Q4-Q1 numbers. Stuffed channel, bad product mix and cancelled ordered often gives you such awful results that going back in line with seasonality can appear like significant gains. Only when you compare the numbers to Q2 2006 will you have a better perspective and see the cracks in AMD's business model.

But the good news indeed is that AMD is back within seasonal trends. The desktop market did rebound this quarter but the big gain for AMD is in the mobile market. Design wins in the mobile commercial space is a positive sign for AMD. AMD's strategy going forward is to increase mobile mix and scale down desktop shipment (and not a single word about DTX, imagine that). This furher clarifies why Intel plans to focus all marketing efforts towards the mobile segment. As AMD is looking at this segment as fertile ground to increase margins, Intel is definitely not happy with this development.

As AMD recommits itself to gaining unit share focusing on the mobile segment, this should send shivers down the spine of the margin-oriented investors out there. The good news for Intel is that AMD seemed to be focused on the value segment. I can't imagine how many times Hector mentioned the word VALUE in his mini speech. AMD suggests that nobody cares about the size of the die, the process node nor the raw performance of the processor. The customers only care about choice, how the product will respond to their needs and whether it is a "native quad core" or not. And since AMD said that they are in the "forefront" of this shift in consumer attitude, this should allow Intel to maintain the useless performance leadership throughout the remainder of the year.

While I find it facinating that there was no mention of the word MONOPOLY during this earnings report, AMD did say that the litigation againts Intel is going very well. Subpoenaed customers who lost all their rebates from Intel are delighted about how free the market has become. Maybe they meant "free" literally.

With regards to Barcelona, AMD mentioned that it wasn't the yield that was causing the low speeds but instead it was the complexity of the design and are working on fixing the problem soon. For a Q3 product shipment, saying such things this late is alarming. I definitely prefer to have yield problems over design problems when you're this close to launch. But this shouldn't be a problem as AMD is planning a scaled introduction of Barcelona. Luckily they're expecting a scaled acceptance of its eco-friendly processors anyway. AMD confirms that their non-performance focused customers like SUN and CRAY who are planning to build supercomputers are quite happy with what they see.

When asked about its asset-lite strategy, AMD declined to comment on future plans which hints to a big announcement sometime in the future. Looking at the scaling down of CAPEX for the Fab30 upgrade, I am inclined to think that Fab38 may skip a process node or two as AMD will try to minimize expense while increasing reliance on foundries. AMD's major cash problems continues with a negative flow in the region of $900M for the last quarter. It is obvious how this is limiting AMD's choices in expanding capacity and other long term investments.

Other notable items include how AMD was forced to write-off $30M worth of inventory simply because the CPU's are with DDR1 integrated memory controllers. For the 32nm node, AMD is considering using BULK silicon instead of SOI. That should be the final word in that silicon wafer argument.

Overall, a bit of a good news as AMD shows signs that its business is back in line with seasonality. That should create stability in its financials and improve guidance. But at the same time, AMD's problems are starting to show some degree of permanency. AMD cannot continue to do the same things and expect different results. So while its insistence on gaining unit share is making some investors a bit nervous, its silence on the asset-lite strategy, coupled with a solid line up of consumer OEMs, are giving the impression that there is hope after all. And since AMD and Intel are measured with a different set of standards, sometimes for AMD, doing bad can sometimes be good enough.