AMD sees ATI buy as a way to help fight Intel

It hopes to incorporate ATI's technology in various chip platforms

With its acquisition of ATI Technologies Inc., Advanced Micro Devices Inc. is hoping to break Intel Corp.'s "monopoly grip" on the chip market by offering more flexibility to PC makers and moving into emerging markets, according to an AMD executive.

By incorporating ATI technology, AMD is looking to offer chip platforms -- including a central processing unit, and a graphics chip and chip set -- for use by PC manufacturers, said Thomas M. McCoy, AMD's executive vice president and chief administrative officer. McCoy detailed AMD's strategy yesterday, a day after the acquisition was announced.

The platform approach is also used by rival Intel, which dominates the chip market.

For example, in the server market, where AMD is strongest, the company had a 22.9% market share, compared with a 76.8% share for Intel at the end of the first quarter this year, according to market researcher IDC.

Intel officials declined to comment for this story.

New platforms will be used to move AMD into the expanding digital device market, where ATI graphics chips have a stronghold. AMD also will move into emerging markets such as South America, India, western China and Africa -- where demand will rise for low-cost, integrated processors with graphics capabilities, McCoy said.

"In particular, we need to grow our business on the mobile side," McCoy said, adding ATI is strong in the sector.

AMD's partnership with NVidia Corp., ATI's main competitor in the graphics chip market, will not change, McCoy said. AMD is "highly dependent" on NVidia and will continue to work with the company as long as customer demand remains, he said.

ATI has worked with Intel for decades, even though Intel has been developing its own in-house graphics processing capabilities. The purchase by AMD will not shut out Intel, McCoy said.

"It will be Intel's choice if it wants to preclude that [relationship] or not," McCoy said.

McCoy alleged that Intel has hurt PC makers by not giving them enough of a selection of chip platforms and that this limits innovation by the manufacturers. He said AMD will let PC manufacturers have a greater say in designing chip platforms.

PC manufacturers would like to see a market where two chip producers hold equal market share, since the manufacturers could then play the suppliers against each other, according to Brian Gammage, an analyst at research firm Gartner Inc.

However, PC manufacturers may not show much interest in AMD's plan to offer more input in chip design, since uniformity of components is key in the PC industry, said Gammage.

Hardware for the mass market can't be changed dramatically because it has to work with standard software, Gammage said, meaning there is a limit to the amount of differentiation PC makers can offer.

And overall, as PC components have become commodities, costs have been cut in the manufacturing supply chain to the point where PC makers compete mainly by cutting retail prices, Gammage said.

Dell Inc., for example, has historically led the PC market in its mastery of logistics and ability to reduce supply chain costs. One of the major manufacturers using Intel chips and the PC market-share leader, Dell has been a victim of its own success, Gammage said. Other PC makers have learned from Dell, which is now reduced to single-digit growth.

That means AMD is charging ahead in an uncertain market.

"There's a very clear gamble going on here," Gammage said. "AMD's looking to buy this acquisition to take a greater share in a market where when volumes go up, prices come down."

Copyright © 2006 IDG Communications, Inc.

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