Intel, which has been losing market share in computer processors to AMD, now looks better placed to weather a brutal price war that seems set to worsen.
Analysts say Intel is likely to regain the technology crown with new chips hitting the market over the next few weeks. The company is counting on the all-new designs to stop several quarters of falling sales and profits.
"Intel's [average selling prices] are coming down, but they have new products coming in that assume the higher price points. AMD is really kind of stuck," said Hans Mosesmann, an analyst at Moors & Cabot Capital Management. "Bringing in these products quickly is very disruptive."
AMD, once relegated to mimicking Intel's advances, has emerged as a nimble and innovative competitor and has steadily grabbed market share with powerful and energy-efficient chips many have said are superior to Intel's offerings.
Now, say analysts, Intel looks like it's holding most of the cards. It has cut prices on many chips by 30 percent to 50 percent to make way for the new products, which will sell at the original non-discounted price points.
Intel's early adoption of new technologies means it can make chips cheaper and choose to either boost its margins or keep its prices low to pressure AMD. With no new products until the middle of next year, AMD will have to keep its prices low to hold on to its gains.
AMD cuts prices
And this is something that AMD has in fact done this week, in a bid to defend its market share, slashing prices on its top chips by as much as 57 percent. For instance, AMD dropped the price of its dual-core Athlon 64 X2 5000+ (Socket AM2 only) to $301 from $696 when it last published a price list in May. It also cut the price of the Athlon 64 X2 4600+ (Sockets AM2 and 939) by 57 percent to $240 from $558.
Although the biggest AMD price reductions were in PC processors, the company also cut prices for laptop processors. Prices of its AMD Turion 64 mobile chips fell by as much as 26 percent, with its Model ML-44 down to $263 from $354 in May. Prices for AMD Sempron chips for desktops and laptops also fell.
However, Opteron prices remain unchanged, so visions of cheaper servers -- where AMD now has 22.9 percent market share according to IDC -- will have to remain firmly in the imaginary domain -- for now.
Meanwhile, AMD executives are adamant that they can continue to gain share against Intel, which sells about 85 percent of the microprocessors used in personal computers. AMD sells most of the rest.
Speaking after the company's earnings report last week, AMD executives dismissed the impact of Intel's price moves, saying that although prices on its chips for desktop and laptop computers fell slightly in the last quarter, prices for its lucrative server chips actually rose.
"The issue we're seeing in the marketplace is not so much the level of aggression [by Intel] but how it's being communicated and [the] level of disruption it's creating among partners," Henri Richard, AMD's head of sales, told analysts on a conference call.
Chief operating officer Derrick Meyer boasted, "Price competition doesn't bother us, because it's nothing new for us."
Investors take the hard line
Investors, however, were unconvinced.
AMD shares plunged more than 15.7 percent on Friday and were trading at their lowest level in a year. Intel shares rose 0.3 percent.
"AMD just made the same mistake that Intel made a quarter ago in giving overly optimistic guidance of strong seasonality and market-share gains," said Cody Acree, an analyst at Stifel Nicolaus. "By giving that guidance, they have set the bar where possible and maybe a probable downside."
Rising inventories are a common concern for both companies. Each saw inventories rise by 20 percent in the last quarter, creating billions of dollars of overhang that will weigh heavily on bottom lines if the PC market stalls.
"We are definitely concerned about the possibility that weaker-than-expected demand could lead to significant inventory write-offs in the coming months at both Intel and AMD," Kevin Vassily, an analyst at Susquehanna Financial Group, said in a report.
The rising inventories also indicate that AMD and Intel are both counting on winning market share. But, as Acree pointed out, they can't both be right.
"There will be an excess microprocessor capacity issue sometime through the back half," Acree said. "The question is, will it end up in AMD's lap or Intel's?"
There's one issue on which there's likely to be little question however: with a processor price war in prospect, the prices of hardware -- desktop, mobile and maybe even servers -- can only come down. And that's good news for IT admins.