PC chip sales hit unit record, but where's the money?

Price war between AMD and Intel keeping profits down, analysts say

Worldwide PC microprocessor unit sales hit a record high in the third quarter, but revenue is not keeping pace, according to an IDC analyst.

The number of units sold in the third quarter of this year was up 14.3% from the second quarter, according to Shane Rau, a PC chip analyst at the Framingham, Mass.-based analyst firm. Chip makers sold 6 million more processors than were sold in the fourth quarter of 2006, which had been the top quarter for unit sales. Rau declined to say how many chips were sold in the latest period.

However, the third-quarter sales record did not result in a record for revenue, which was set in the fourth quarter of 2005 with $8.9 billion. Revenue this past quarter rang in at $7.95 billion, which was up from $6.93 billion in the second quarter.

"On a unit basis, this was the most microprocessors for PCs sold in any quarter in history," said Rau. "You would think record unit sales would equal record revenue, but that's not the case. ... The fact that revenue was decent to flattish refers to the price competition between the vendors. Price cutting is driving demand but hurting revenue."

A chip war between market giant Intel Corp. and its biggest rival, Advanced Micro Devices Inc., has seen both companies cut prices to grab as much market share as possible. Rau pointed out that PC chip prices in the third quarter of this year were down 21% from the fourth quarter of 2005, when the revenue record was set.

Rau said Intel was the first of the two competitors to feel the pinch of the price war, as it struggled between 2003 and late 2005. And while Intel stumbled, AMD came on strong, increasing market share and mind share. Intel responded last year with a reorganization that included selling off several divisions and updating product lines. That curbed AMD's momentum, allowing Intel to grab back some of its lost market share.

Rau noted that while AMD is still losing money, the company is closer to breaking even than it has been in several quarters.

According to IDC's numbers, in the third quarter of 2006, Intel held 76.1% of the PC microprocessor market, while AMD had 23.6%. In the first quarter of this year, Intel's market share grew to 80.9%, while AMD's slumped to 18.6%. For this past quarter, though, Intel came in at 76.3% and AMD at 23.5%.

Rau said that PC chip inventory in the channel is slow because PC makers are drawing out supplies to build machines for the upcoming holiday buying season. That, he added, should be good news for both chip vendors.

Copyright © 2007 IDG Communications, Inc.

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