AMD separately announced Tuesday that it will lay off 2,300 workers by the end of the second quarter of 2002--or 15 percent of its work force--and close two fabrication facilities.
Looking to cut costs, Gateway will eliminate sales of its Select line of Athlon-based PCs over the next "couple of months," Gateway spokeswoman Lisa Emard said Tuesday. Gateway will also re-brand its PCs, replacing the Essential, Performance and Professional brands with 300, 500 and 700 labels.
The move marks another blow to AMD, which has seen its fortunes change with the decline of the PC market.
"This was a premier customer in AMD's target market," said Ashok Kumar, an analyst at US Bancorp Piper Jaffray. Kumar estimates that Gateway accounted for 5 to 6 percent of AMD's processor sales.
A year ago, AMD was gaining market share and trying to establish a foothold in the U.S. corporate market. Since then, the slow PC market, price cuts from Intel and the need for PC makers to simplify their product lines have begun to constrict the outlets for AMD chips, although its market share remains higher than it was a year ago.
IBM phased out AMD chips in computers sold in North America and Europe over the summer, and MicronPC announced it was solidifying its line behind Intel. With Gateway stepping aside, Hewlett-Packard and Compaq Computer become the only top-five PC companies in North America to market the company's chips, and they are planning to merge.
In August, AMD confirmed it expects an operating loss during the current quarter.
Tuesday's announcement is a "big blow for AMD because Gateway was one of their volume sellers," said Roger Kay, an analyst at IDC.
Joe Osha, an analyst for Merrill Lynch, agreed. "It's a major blow. That was one of their largest customers," he said.
The move could also prove to be a liability for Gateway. The Athlon chip has been popular with gamers and consumers, a target audience for Gateway. And although the PC market is slow right now, an unforeseen chip shortage on Intel's part could also affect sales. Gateway began using AMD's Athlon chip in early 2000 after it couldn't get adequate supplies from Intel.
Emard said Gateway's decision meets three objectives: cutting costs, simplifying product offerings and increasing overall customer satisfaction.
Though processor choice is an element in customer satisfaction, "I think we still offer a huge number of choices," she said. "For now, we feel like we can cover from the very low end to the high end by lining up our product range behind Intel."
Given AMD's off-and-on relationship with the PC seller over the past few years, AMD representatives believe the chipmaker will win future business from Gateway.
"We've been in this position before with Gateway, and we're confident we can work with them in the future," said AMD spokesman Ward Tisdale.
Indeed, Gateway's decision was most likely a direct result of its financial situation, analysts say.
Most PC makers have consolidated their PC offerings in recent months, as it is costly to maintain several separate desktop lines, especially two that use entirely different processor and chipset designs, analysts say.
"All these supply moves are short term," Kay said. "There's no ideology involved. It's a matter of what makes sense economically."
Kay added that, theoretically, "It could be that Intel was willing to give some of its lower-volume customers better pricing if they agreed to give the company an exclusive."
However, past decisions to move away from AMD have been just as damaging to Gateway as they have been for AMD.
One of Gateway's more recent forays into the AMD camp, a line of Select PCs based on the k6-2 processor launched in early 1999, allowed Gateway to price desktops at lower prices than similar offerings based on Intel's Celeron chip. Later in the year, however, Gateway discontinued the Select line and switched another of its K6-2-based desktops, the Profile, to Celeron.
Disaster followed when Intel could not deliver enough of certain Pentium III processors to meet demand that holiday season. Gateway lost sales on some of its most popular systems.
After publicly ripping Intel, Gateway resurrected the Select line using AMD's Athlon processor in early 2000. It has offered Athlon chips since.
This year's move could be just as dangerous. "Even as the firms are all cleaving more tightly to Intel, they're reducing their alternate supply," Kay said. "It's always better to have more than one supplier. From a general business point of view, it's not a good thing to start crippling the only alternate supplier to Intel."
Though Gateway is likely to come back to AMD at some point, the move does not bode well for AMD.
It's a "big blow for AMD, because Gateway was one of their volume sellers," Kay said.
Long term, AMD faces the potential of further consolidation among its customers as Hewlett-Packard and Compaq, its two largest brand-name supporters, merge. AMD also faces intense pressure from rival Intel.
Intel has used price as a lever, dropping prices numerous times on its Pentium 4 chip to bring the chip into the heart of the PC market. Pentium 4 PCs are available at prices starting around $800.
For HP, the proposed HP-Compaq merger is likely to bring consolidation of the companies' two consumer PC lines.
"Both of those (companies) have bets on AMD, but you've got to look at the fact that there's going to be line consolidation when they smash those two companies together," Kay said. "It makes the future look shaky for AMD."
But AMD is determined to show customers it has the superior processor technology. The chipmaker is expected to launch a new marketing campaign next month that will rename its Athlon chip Athlon XP and show consumers that although Athlon is slower in clock speed than Pentium 4, it offers comparable overall performance.
Despite the events, it's too early to write off AMD in the battle with Intel, analysts say. For one, AMD is strong in the market for "white box" PCs, systems manufactured by smaller companies. Such PCs account for as much as 30 percent of the overall PC market, according to some industry watchers.
However, Gateway's decision does point to AMD's poor record in winning support from the major makers of business PCs.
"The critical piece (for AMD) remains the corporate desktop," said Dean McCarron, principal at Mercury Research. "Once AMD gets a few corporate wins, then it really doesn't matter much if somebody comes or goes."
AMD executives have said that the company's best chance for getting into the corporate market is likely through notebooks in North America. Although the company has yet to penetrate the U.S. corporate market in a big way, some manufacturers have introduced Athlon-based systems for businesses in Japan and Europe.