Suddenly, It's AMD Inside

The perennial underdog is challenging Intel with a new class of microprocessors


For 35 years, Advanced Micro Devices Inc. (AMD ) stood in the shadow of archrival Intel Corp. (INTC ) AMD churned out lower-priced clones of the tech leader's chips and occasionally enjoyed a hit that helped boost its meager profits. But bad times easily outweighed the good. Again and again, Intel used its manufacturing muscle and pricing power to stymie AMD's ambitions, preventing it from gaining a foothold in lucrative markets such as servers and corporate PCs.

Wave goodbye to the great imitator. In what may prove to be an historic reversal of fortune, AMD Chief Executive Hector de Jesus Ruiz has grabbed the momentum from his giant rival in recent months and left Intel scrambling to catch up. The perennial underdog was first to market by more than a year with a new class of microprocessors that's proving extremely popular with corporate clients. It has smoothly launched new manufacturing techniques, while Intel has been plagued with an uncharacteristic string of delays, glitches, and recalls. And it pushed forward so aggressively with a new "multiple core" chip design, which squeezes several processors on one chip, that Intel was forced to speed up its own transition on some chips by as much as two years. In a humbling moment, Intel executives announced the acceleration at the Intel Developer Forum on Sept. 7, a week after AMD showed off a working version of its own multiple core processors. "We've had some fumbles," says Intel President Paul S. Otellini.

AMD is making the most of its newfound edge. The Sunnyvale (Calif.) company has grabbed 7% of the low-end server market, up from almost nothing two years ago. It passed 50% of the U.S. retail store sales for desktop PCs in recent weeks. And the company is using new manufacturing techniques in the memory-chip market to outgun rivals both on cost and technology, analysts say. When Intel shocked Wall Street on Sept. 3 by slashing its forecast for third-quarter sales and profit margins, the chip giant cited "lower than expected worldwide demand." But AMD says it's seeing no indication of a broad slowdown, and analysts say that Intel's troubles have been exacerbated by its pesky rival. "It's clear they don't have the products that customers want today," says Ruiz. "That's just the way it is."

With the ball firmly in his hands, the 58-year-old Mexican immigrant plans to make this a new game. He ticks off a list of ambitious goals for the company: 10% of the low-end server market by yearend, 30% of the corporate PC market in five years, 50% of the consumer PC market in five years. And in flash memory chips, which store data in digital cameras and other devices, he's aiming to make AMD the leading provider, topping Intel, Samsung Semiconductor Inc., and a slew of others in the fiercely competitive field. "We're here to stay," he says. "We're not going away."

So confident is Ruiz, who holds a PhD in electronics, that he's targeting growth markets well beyond AMD's traditional strengths. Last year he created a group to figure out how to incorporate AMD processors into non-PC devices such as cellular phones and consumer electronics. And BusinessWeek has learned that AMD is planning to announce as early as October that it is teaming up with contract manufacturers to create an inexpensive, networked PC for sale in India or China. It's part of Ruiz's ambitious plan to help connect 50% of the world's population to the Internet by 2015.


The company's striking success raises the possibility of a profound shift in the technology industry. Intel has long dominated the microprocessor business, in much the way that Microsoft Corp. (MSFT ) has dominated software for PCs. But if Ruiz can reach his goals, what was once a near-monopoly could become a more competitive duopoly. That could spark faster development and more innovation. And since microprocessors are the brains of all things digital, the benefits could spread to everything from computers to flat-panel televisions. "It will be good for the industry and good for the consumer," says Jay Desai, founder and CEO of the Institute of Global Competitiveness, a think tank and consulting firm in Cary, N.C.

Can Ruiz keep going toe to toe with Intel? It would be a small miracle. Intel has so much more heft, money, engineering talent, and other resources that, with a determined effort, it should be able to turn back AMD in short order. Intel is almost seven times as large, with expected revenues of $34 billion this year. Its projected 2004 profits of $7.35 billion mean that Intel earns in 11 days what AMD will make all year. And Intel is sitting on $14 billion in cash, compared with $1.1 billion for AMD, giving Intel a vast edge in funding research and development and in constructing cutting-edge manufacturing facilities.

Still, at least for now, AMD is defying the odds. The company looks as if it will easily hit Ruiz's server target and has a good shot at grabbing 50% in consumer desktop PCs. Although AMD will probably fall short of its 30% goal in the corporate PC market -- a bastion for Intel and its closest ally, Dell Inc. -- its multipronged attack is nevertheless sharply boosting sales. Moreover, it will most likely put the company in the black this year for the first time since 2000. For 2004, revenues are expected to surge more than 50%, to $5.3 billion, while net income hits $227 million, according to consensus estimates. In 2005, revenues are projected to climb a further 10%, to $5.8 billion, as profits hit $328 million.

For the first time in the company's history, AMD wields a potent weapon that makes Ruiz's ambitious goals more than a wish list. Last year the company took the wraps off the world's first industry-standard chip that can process data in chunks of either 64 bits or 32 bits at a time, without any performance trade-offs. The chips, dubbed Opteron for servers and AMD Athlon64 for high-end PCs, offer the cheapest possible path to the next level of high-performance computing.

Its success is due in no small part to Intel's missteps. Intel announced it was working on a rival 64-bit chip, Itanium, back in 1994, about five years before AMD announced plans for its own version. Itanium, however, didn't hit the market until 2001, two years late, and even then was a huge flop. Intel released a second version of Itanium in 2002, but it was never the hit Intel expected because it required companies to rewrite their existing 32-bit software to take advantage of the new architecture.

That gave AMD an opening. In March of 2003, the company released Opteron. Although it too was delayed, corporations quickly warmed to it because it could handle both the older 32-bit software and new 64-bit applications. That saved companies headaches and millions of dollars in transition costs. "It's no small fact that, although a small company, AMD is going to drive the architecture for the next generation of microprocessors," says Banc of America Securities (BAC ) analyst John Lau.

Intel is scrambling to stop that from happening. In July, CEO Craig R. Barrett sent a blistering e-mail to employees saying that the recent execution troubles were "not acceptable." Barrett and Otellini, who is expected to take over as CEO in 2005, instituted a companywide review of upcoming chips. The result: Intel jettisoned several chips under development, quickly introduced a server chip that could handle 64-bit and 32-bit software, and shifted nearly all of its engineers to work on multiple-core chips for servers, desktops, and notebook PCs. To help jazz up its brand and broaden its marketing message beyond the core PC market, the chipmaker also announced on Sept. 7 it had lured Eric B. Kim, Samsung Electronics Co.'s top marketing exec, to work in the same capacity at Intel. Otellini says the company is "going back to the basics."

LONE HOLDOUT One of the key players in the battle between AMD and Intel will be Dell. The Round Rock (Tex.) company is the lone holdout against AMD among the major computer makers. Dell uses Intel chips exclusively in both servers and personal computers, even though IBM (IBM ), Sun, and Hewlett-Packard (HPQ ) have started using AMD's chips. One reason for Dell's loyalty is that it derives loads of benefits from the close relationship, including millions in marketing dollars from Intel and early insights into future technologies. Ruiz figures that the only way to persuade Dell to use AMD chips is to win over so many customers that Dell is forced to change. Already, Dell rivals are crowing about the brisk business they're doing with Opteron servers. "Our Opteron boxes are just flying off the shelf," says Sun Microsystems Inc. (SUNW ) Chief Executive Scott G. McNealy. A Dell spokesman says it is constantly evaluating suppliers but won't comment specifically about AMD.

Dell's reticence is one reason for AMD's mixed prospects in the PC market. The chipmaker is making progress in consumer PCs, particularly desktop models, because of its low prices. But the more lucrative corporate market is proving much more difficult to penetrate. There, AMD holds only about 8% share and, without winning over Dell and getting more support from IBM and others, that's unlikely to increase very much.

AMD has also been stymied by product delays at Microsoft Corp. (MSFT ) The software giant originally planned to release a 64-bit operating system this year, but that has been pushed back until the first half of 2005 because Microsoft needed more time to improve security in Windows. The AMD Athlon64 desktop chip, which launched last year, is expected to shine when paired with the software for which it was designed. Microsoft's delay has given Intel time to fine-tune a competing chip to go with the software giant's release. Otellini says the chipmaker will have a 64-bit desktop chip when Microsoft rolls out the Windows update.

Perhaps the most difficult task for AMD is building credibility with investors. The chipmaker has a long history of inconsistency. Impressive products often have been followed by flops. Investors remain skittish, despite the strong financial performance of late. The chipmaker's stock trades at about $11 a share, not far above its 52-week low.

Still, for Ruiz, the company's improving fortunes and recent success against its nemesis are accomplishments worth celebrating. At a gathering with employees in July, he grabbed his Gibson guitar, introduced Peter Frampton, and launched into an impromptu jam session. "We should have some fun while working so hard," he says. It has been a long time since an AMD exec could utter such a simple phrase.

By Cliff Edwards in Sunnyvale, Calif.

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