Friday, February 24, 2006

INTEL's collapse will be sooner than I expected

In this article, I proposed a way out for INTEL in 2006. I was trying to be in INTEL's seat and find a route to survival, I also explored some alternatives. The conclusion was there was ONLY one way for INTEL to tough out 2006 and hope for a better 2007.



It is simple but inescapable logic: INTEL's unit share loss is inevitable due to its inferior technology, even Joe Osha sees that today. The only way for INTEL to maintain constant revenue is to reduce production and hike prices. This is a workable plan, because AMD can only supply about 30% of the market, INTEL can dictate the prices on the remaining 70%.

By reducing production and hiking prices, INTEL can keep inventory low and maintain constant revenue and even higher profit for 2006 and hope to come back in 2007 with vengeance.

But INTEL execs seem have chosen instead to expand production on soon to be obsolete Netburst and 32 bit Core Duo products and slash prices, despite the fact that INTEL's manufacturing efficiency is only a fraction of AMD's. The result of this is the following:

1) Since unit loss is inevitable, reduction in price leads to revenue shortfall and crash of stock price.

2) Inventory build-up of Netburst (P4 and Xeon) and 32 bit mobile (Core Duo, P-M) will perpetuate into 2007, causing profitability problems for the next couple of years.

For INTEL folks, it will be a long and harsh winter ahead.

7 Comments:

Anonymous Anonymous said...

Great post but I have a dumb question. Wouldn't AMD have to slash their prices too to continue to take market share as they have recently with Opteron? So wouldn't AMD have potential revenue shortfall issues in 2006 too? Thanks for a great website, I've made good money off AMD in past 3 years but am concerned about price war and have my money on sidelines at the moment.

10:37 AM, February 25, 2006  
Blogger Sharikou, Ph. D said...

AMD has already performed a preemptive strike by slashing its Opteron dual core prices by as much as 50%, meanwhile Intel's Xeon DC is priced at over $1000.

On the desktop front, AMD also reduced price, but demand is so high, that its lowest mainstream chip the Athlon 64 3200+ is running into a shortage, and its price is higher than listed price.

The situation right now is INTEL still has a higher average selling price than AMD, but people are getting to know AMD64 is better.

The total cost of going INTEL is higher even if INTEL slash its ASP to go below AMD, because users of INTEL platform has to pay extra money for INTEL's chipset, bigger power supply (> 500 watts), heavier heatsinks (> 2 pounds) and more electricity (100watts more), also INTEL's platform has a shorter life due to the heat. For AMD users, since there is no northbridge chipset, the motherboard cost is lower, since AMD64 CPUs are cool, they need only 250-300 watt power supply, their heatsink is lower cost, they pay less electricity, and enjoy AMD64 future proof technology with longer system life.

10:50 AM, February 25, 2006  
Blogger Sharikou, Ph. D said...

Let me add an additional comment. INTEL's lowest Pentium 4 goes down to 2.66GHZ (the P4 505, 506, P4D 805), AMD only has Semprons in such low performance range. AMD has stopped production of the Athlon 64 3000+ socket 939, the lowest is now Athlon 64 3200+ socket 939. Therefore, AMD's strategy is to use Semppron 64s or even Geode NXs to battle INTEL's low end Celerons and Pentium 4s, and starts the mainstream range at 3200+. If you check Pricewatch.com, INTEL's P4 3.2GHZ is priced at $180, while Athlon 64 3200+ socket 939 is at $165, when you add the other cost savings, the AMD solution is much less expensive.

11:28 AM, February 25, 2006  
Anonymous Anonymous said...

The problem with reducing production is that COGS will go up. Improving profitability while creating idle factories is a very difficult endeavor

7:57 AM, February 27, 2006  
Blogger Sharikou, Ph. D said...

I think 10% reduction of production should be ok. Production drop will cause shortages and automatically drive up price.

10:27 AM, February 27, 2006  
Anonymous Anonymous said...

hey Sharikou, you seen this?

http://www.sun.com/software/solaris/ning.jsp

4:01 PM, February 27, 2006  
Anonymous Anonymous said...

my brain is starving...no post since the 24th? help save the chads.....post

6:16 AM, February 28, 2006  

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