Saturday, October 29, 2005

INTEL and DELL have become each other's liability

AMD view DELL as a victim of INTEL's monopolistic behaviour, this is a grand strategic misjudgement and can result in a fatal strategic blunder for AMD.

DELL is co-conspirator in INTEL's illegal control of the x86 market.

Today, with INTEL being a widely acknowledged second-class CPU maker, and DELL synonymous to dirt cheap commodity IT, INTEL and DELL have become each other's liability.

DELL's INTEL darling status is hurting INTEL in at least two ways:

1) With DELL getting Most favoured prices, other x86 makers found it near impossible to profit in INTEL market space and will be more inclined to use AMD. In the past, this was not a big concern due to AMD's small capacity and limited technological advantage. Now, with AMD64's 5 year technology lead and the impending flood of FAb36 and Chartered Opterons, Athlon64s and Turion64s, companies like HP, Lenovo and Acer will use AMD even more.

2) With DELL getting deep discounts, INTEL is essentially selling CPUs at lower ASPs. Since INTEL is losing market share to AMD anyway, the only way for it to maintain its revenue and profit level is by raising prices. With DELL being an major INTEL customer and getting special prices, INTEL is losing potential revenue.

DELL's INTEL exclusive stance is hurting DELL even more:

1) DELL was expected to translate its market share in cheap and low margin products into high profit margin enterprise products. That's why DELL has a 18x price/book ratio, Wall Street is counting on the dude to sweep the whole IT market, from PCes to servers. But INTEL's chips are too slow, too hot and too dumb to have a future. DELL has fallen too far behind, compared to SUN and HP.

2) Even in consumer space, AMD is taking over the high ground. When DELL found its $299 INTEL boxes aren't generating enough money, it cut free delivery and introduced higher end XPS boxes. But since AMD has a commanding performance lead, and high end users are smart, DELL's expensive boxes are not going to sell enough units to generate profit.

3) Because of the above, DELL will perpetually be marked as a cheap IT gear maker and permanently lose its chances in the premium markets.

Therefore, DELL is locked in razor thin margin business, and DELL relies solely on INTEL kickbacks to stay in black. Once the feeding tube is disconnected, it will dehydrate, degenerate and die.

DELL parasitic existence is draining INTEL's life blood. Without DELL, there is a level of survival that INTEL can tolerate. AMD's capacity is still limited, for a period, INTEL can still dictate a monoplistic price on the portion of CPUs that AMD can't supply. By cutting the special bonuses to DELL, INTEL can hope to keep others more interested in its mobile technology, which is still having a perceived lead over AMD on battery life and wireless connectivity.

It's therefore to the advantage of AMD to keep INTEL feeding DELL as long as possible.

For AMD, DELL is like a disease and plague. If AMD touches DELL, its actions will be viewed as betrayal by SUN and HP, who were eyeing DELL's market share, and it will lose credibility in the whole enterprise market forever.


Blogger plantlife said...

I agree with you, AMD's loyalty to its partners should exclude Dell from its customer list. Dell is already making garbage products, and since their margins are so tight, their earnings will plummet if the lose the Intel only kickbacks.

Dell will decide he needs AMD when he is desperate, but AMD won't need him. The only value Dell can bring to AMD is the prestige of breaking into Intel's last stronghold. At that point it is believed that even the dumb IT managers will consider using AMD.

But when that time comes, will AMD need their business, probably not.

8:42 PM, October 29, 2005  
Blogger Igor Stavnitser said...

I am sure that DELL has also been considering dropping the sweatheart INTC pricing deal. They used to make most of the money in the server hardware. Margins are extremely high in a high-end server business. When DELL will be on the doorsteps crying for Opteron allocations, I see nothing wrong with AMD selling to DELL. Winning in business is not about being vindictive. DELL messed up: they got hooked on the discount as a way to make money, forgetting about innovation and their customers.
If they are shaking the spell off, there is nothing wrong with helping them to do good and buy a lot of Opterons :)

2:51 PM, October 30, 2005  
Anonymous Serg said...

The competition everywhere is...

7:33 AM, May 16, 2006  

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