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Gateway's AMD decision reflects changing battle

The computer maker's decision to drop Advanced Micro Devices chips from its future computers is a sign that the lines are being redrawn in the battle between AMD and Intel.

Gateway's decision to drop Advanced Micro Devices chips from its future computers is a sign that the lines are being redrawn in the battle between AMD and chip giant Intel, analysts say.

The fighting now is over the performance of high-end processors, such as Pentium IIIs or Athlons, instead of the price of low-end ones, analysts say. And for AMD, the account to sell low-end chips to Gateway was expendable.

"The competition here, instead of devolving into a price-cutting mess as it did in the low end, is being fought on the basis of performance," said Insight 64 analyst Nathan Brookwood.

The battle at the low end has been brutal on AMD's profits as it tries to carve out some of Intel's market share by selling cheaper chips. But AMD has indicated in recent months that it's not willing to sell low-end chips at losing prices--perhaps as a way to make room in its production lines for its higher-powered, more-profitable Athlon chip, Brookwood said.

Other analysts agree that the focus is shifting. AMD can't be too happy about losing the Gateway account, but it's not critical for the chipmaker, said Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray. Micron, for example, sells about a million computers a quarter, of which only about 10 percent are AMD-equipped, he said.

"It's not a big deal for either partner," he said.

Investors reacted to the news today as AMD stock dropped 4.92 percent to close at 19.31.

AMD: Gateway's leverage against Intel
Gateway incorporated the AMD chips as leverage to get lower prices from the king of the hill, suggested Aberdeen Group analyst Shawn Willett. "Gateway used Athlon as a kind of lever to get better terms from Intel," he said.

And Intel seems to be willing to play ball. "It's real interesting how scared Intel is of this chip," Willett said. "Intel is going to great lengths to prevent Athlon from gaining headway."

Several performance tests have shown the new high-end Athlon chip to have better performance than corresponding chips from Intel. But Intel has new, faster "Coppermine" chips due at the end of October, sources say.

AMD will have a hard time convincing buyers that they sell high-performance chips as well as low-cost chips, said Kumar.

"If your brand is perceived as a value brand, it's hard to extract a premium for it," he said. "Intel is considered a premium [manufacturer], and AMD is considered a value show."

In any case, better market share in the high end isn't a panacea. "The [profit] margins are better in the high end, but they're getting worse," Willett said.

Kumar and other industry sources said Gateway will discontinue the use of AMD's chips in its consumer line after the current models are phased out. These were the only models where AMD chips were used.

Gateway began using AMD chips in certain models of its Select series computers in February and its Profile all-in-one computer in June.

Gateway declined to comment on "rumors and speculation," a spokesman said, regarding the disappearance of AMD from Gateway's home-oriented products. However, about the company's decision not to use Athlon chips, the spokesman said: "It was a business decision based on one line of products at one given point in time. Our current product line is already meeting the needs of high-end users quite well."

AMD representatives were not immediately available for comment.

With its new Athlon chip, AMD has won places in the product lines of companies such as IBM and Compaq Computer.

The battle between Intel and AMD doesn't look likely to end any time soon. Intel released faster low-end Celeron chips last week, some of them aimed to make inroads in the mobile computer market. And today, AMD unveiled new K6-2 chips for the same market that run a hair faster.