Chip Price War Helps Customers, Hurts Intel And AMD

An ongoing processor price war between Intel and Advanced Micro Devices is lowering the costs of chips that power most computers. But both chipmakers are suffering as falling prices cut revenue, and they could face more financial problems if anticipated increases in sales fail to materialize.

During teleconferences last week by both Intel and AMD, executives pointed to pricing pressures—particularly in the PC market—as a primary reason that neither met original growth targets for their second quarters. Both companies expressed optimism that improved demand generally associated with back-to-school sales in the third quarter and holiday purchases in the fourth quarter will improve their bottom lines.

Although some of the price cuts have looked dramatic, with reductions of as much as 60% in some cases, the reality of the price changes may be far less impressive, says Dean McCarron, an analyst with Mercury Research.

"It's really a public reflection of the ordinary pricing battles that go on between the two companies to get customers," McCarron says. "These public cuts tend to have dramatic jumps, but the reality is the [price reductions] are going on continuously and a lot of times [the formal pricing] is just bringing it in line with what they've really been selling this stuff for over the past several months."

Public pricing of processors found on the Web sites of AMD and Intel generally reflect the price-per-processor for sales made in quantities of 1,000 units. Purchasing deals with equipment manufacturers more often involve much larger volumes over extended periods of time where lower per processor prices have been negotiated.

Bob Rivet, AMD's chief finanical officer, last week said that total processor unit shipments were down 4% compared to the previous quarter because of low seasonal demand. Rivet said AMD was also "challenged by deep discounting" by Intel during the quarter. In fact, there were sales opportunities in the second quarter that AMD rejected because they did not make financial sense, he said.

Analyst McCarron says the current price cuts can be traced back several months when both Intel and AMD experienced soft demand for PC processors in the first quarter. The pricing battle was accelerated recently when Intel cut prices on existing inventory in anticipation of the formal introduction of its new Core 2 Duo-based Conroe processor on Thursday.

Intel executives during the company's financial teleconference said they are establishing a three-tiered processor pricing strategy of "good, better, and best." The new Core 2 Duo processor will represent the highest-priced and highest performance tier, and existing processors will drop to the "good" and "better" tiers with lower pricing.

The pricing battle is "much closer to business as usual than something cataclysmic" for either company, McCarron said. AMD, however, has been long-accustomed to surviving on lower margins than Intel. "The impact right now is a little harsher for Intel," he said.