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Gateway eyes AMD deal

The alliance would lead to the first AMD-based Gateway desktop computer. Meanwhile, IBM may use a K6-2 processor in a consumer notebook.

Advanced Micro Devices is inching toward a deal with Gateway that, if consummated, would lead to the first AMD-based Gateway desktop computer, according to sources.

Meanwhile, IBM is considering using an AMD K6-2 processor in a consumer notebook.

While neither deal has been finalized yet, the existence of close negotiations between Gateway and AMD reflect the changing nature of the computer market. Gateway has long been one of the staunchest allies of Intel.

Gateway, however, has seen some of its strongest growth this year in the consumer market, which is increasingly becoming dominated by sub-$1,000 machines. That trend gives cheaper AMD chips an advantage.

A K6-2-based Gateway PC would allow the company to expand its presence in the budget PC market that is increasingly being absorbed by K6-based computers from Hewlett-Packard and Compaq. Also, Sony last week indicated it would come out with a K6 system. A K6-2 based notebook from IBM, which already uses the K6-2 in its Aptiva desktops, would likely end up competing against low-cost notebooks from Compaq that use the K6-2 and National's MediaGX.

AMD, Gateway, and IBM declined to comment on any negotiations. Sources inside and close to the companies confirmed the negotiations, however.

Adding fuel to the speculative fire, AMD chief executive Jerry Sanders said in a conference call with analysts that the firm would probably announce a new alliance with a major PC vendor as well as a new notebook design win.

"We're involved with the top guys--IBM, Compaq, HP, Acer. We're getting another. We expect to add another top-tier guy in the current quarter. We're expanding our customer base generally. I mentioned Sony. There are others," he said. "We're expanding our customer base and gaining market share."

In another segment of the call, Sanders said, "We do expect to have a major announcement in the current quarter of a K6-2 mobile product."

Of course, observers also point out that history says the deal won't go through. Gateway has talked to AMD before with no results. Last year, purported negotiations between the two never came through.

Intel, according to many observers, also does not take incursions into its customer base lightly and is known to marshal company representatives at the hint of encroachment. Additionally, Intel has aggressively cut prices on its processors this year and most expect pricing pressure to continue. Although AMD reported its first profit in five quarters earlier this week, the firm's stock has declined since then.

If the Gateway deal goes through, Gateway would likely incorporate a K6-2 processor, or the upcoming K6-3, in systems selling for less than $1,200, said Ashok Kumar, semiconductor analyst at Piper Jaffray.

"Gateway will probably roll it out in November," he said, assuming the deal can be signed. With the K6, Gateway could hit the $799 price band. "Their core customer, the consumer, is going to $1,000 and under."

Intel, however, won't likely sit back. "Intel is not going to let them pick up a million units a quarter," he added.

These two deals would cap off a heady year for the scrappy processor vendor. A year ago, AMD was suffering from production problems that stumped the supply of K6 chips. The company now has K6 and K6-2 design wins with Compaq, IBM, and Hewlett-Packard. Accordingly, market share has increased. While AMD so far primarily sells its chips into retail computers, the company will try to make a push into the corporate space with the upcoming K6-3 next year, said Sanders.

Last week, Sony announced three new consumer computers for the Japanese market based around the K6-2.

No Sony PCs based around the chip were announced for the U.S. market, but the Japanese models could be a prelude to that, speculated Mark Edelstone, processor analyst for Morgan Stanley Dean Witter. Edelstone earlier this year predicted that AMD could expand its market share to 16 percent or more, based primarily on the strength of growth in the PC market.

Intel is an investor in CNET: The Computer Network, publisher of News.com.

CNET News.com's Stephen Shankland contributed to this report.