Friday, December 09, 2005

INTEL's predicament

AMD's FAB36 has been in production since Oct 14, 2005, finished chips should hit the market soon. No doubt, there will be an oversupply of CPUs in the market, even Joe Osha is worried about the excess capacity. What will customers buy? I think price/performance will be a deciding factor. AMD is used to selling Sempron 64s at $50 or less. No matter how you look at it, INTEL will lose market share and units.

However, what really matters to a company is not units or market share, it's revenue and profits. If INTEL can sell 100 chips for 10 billion, it will be super rich.

So, facing the inevitable decline of units and market share, the only way INTEL can maintain revenue and profit growth is to hike CPU prices.

AMD's capacity is limited and can only supply 25% of the market next year, INTEL has the say on the rest 75%. Furthermore, corporations tend to prefer INTEL brand. INTEL shouldn't have much problem increase the ASPs by 20%, to negate the effect of unit decrease (ASP increase can be done by simply lowering production of low end models).

But there is a problem: INTEL has made it a top priority to keep DELL happy. When the DELL dude makes noise about AMD, INTEL folks cave in and give more discounts, or in other words, selling at lower ASPs. And to prevent others such as HP and Lenovo from being too disgruntled, INTEL must give them some albeit less discounts also.

So, INTEL is facing a dilemma here. On one hand, market share drop is an ineveitability and it needs to hike ASP to maintain revenue growth. On the other hand, feeding DELL is a futile effort to retain market share and will result in lower ASP. (With DELL being the favourite darling, others get pushed over to AMD).

The two are in direct conflict.

Clearly, keep feeding DELL with lower priced products coupled with losing overall market share will lead to revenue and profit short fall.

It seems that the only way out is for INTEL to drop the most favoured treatment for DELL and increase prices cross the board, and make prices the same for everyone, making it possible for every one (instead of just DELL) to profit in the INTEL space and create a more balanced INTEL market.

My suggestions to INTEL:

0) Face the reality that AMD will take 25% share.

1) Abolish the volume based or AMD quota based rebate system.

2) Establish an uniform pricing scheme, set the same equal global price for everyone, just like McDonalds sell cheeseburgers at the same price. Get rid of all discounts. Such as an uniform pricing system will make small whitebox players competitive against big guys like DELL and foster a broader market presence.

3) Reduce the production of low end chips, this will lead to higher ASP.


Anonymous Anonymous said...

Very interesting theory. I think it would be a very good idea for Intel in the here and now. But what will happen when AMD can supply 50% of the market? I guess Intel will have to get their act together before that happens.

Nice analysis.

11:30 AM, February 07, 2006  
Blogger Sharikou, Ph. D said...

What if AMD can supply 50% of the market? INTEL has to give up the monopoly mentality and accept duopoly as the reality of future. Napoleon failed because he tried to do the impossible. Imagine a CPU market with more even split, what is the problem with that?

9:53 AM, February 26, 2006  

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