AMD near deals with PC makers

The lead candidates for K6 processors appear to be Compaq and Packard Bell or Gateway 2000. In contrast, Dell Computer continues to exemplify the group of vendors that show almost no interest in straying from the Intel product fold.

Jerry Sanders, AMD's chairman, told CNET?s NEWS.COM that his company is close to sealing agreements to produce processors for low-cost computers for two new major customers. One of the deals, which would start next year, is contingent upon AMD's ability to produce a higher volume of chips. The other deal, however, is expected to commence this quarter.

If completed, the deals would stand as significant milestones for the embattled processor maker. Low yields on the K6--especially with the 233-MHz K6--as well as a processor price war fueled by Intel have resulted in successive financial losses for AMD. On top of this, the chipmaker has set out an ambitious schedule to introduce a version of the K6 with 3D technology and release versions running at 266 MHz and 300 MHz in the near future.

But AMD also is up against entrenched Intel customers. One company that won't likely soon be on its customer list is Dell. In an interview with CNET'S NEWS.COM, Dell chairman and CEO Michael Dell made it clear he had little interest in looking beyond Intel chips to the AMD K6 processor. "I've wasted time every year for the last eight years looking at [alternative processor] vendors," he said.

Dell says he makes the rounds yearly to other chip vendors but never finds anything he likes. Not surprisingly, he is quite content with Intel chips. The executive said that already in some of his company's PC lines 70 percent of the volume is Pentium II processors, and that by 1998 the venerable Pentium processor should disappear from almost all Dell PCs. The Pentium II, Intel?s newest chip, was introduced earlier this year.

Dell also popped by the AMD booth to say hello to Sanders, who promptly whisked Dell into a K6 demonstration. The conversation between the two illuminates the pitched battle AMD is fighting with Intel. After the demo ended, Sanders launched into a sales pitch infused with the evangelical fervor of a Southern Baptist preacher. He pleaded with Dell to sign up for the K6: "We need you. If you sign on, others will follow," Sanders said.

The AMD chairman was responding to a question from Dell about the lack of acceptance of the K6 in the corporate PC market, where Dell is a leader. Sanders admitted that the K6 is currently finding a home principally in retail-based consumer PCs and that the corporate market remains a holy grail of sorts for the chip.

Later, after the Dell chairman left, Sanders expressed sentiment reflecting Dell's attitude vis-a-vis AMD: "I can't sell a K6 to that guy no matter what I do."

Sanders alleged that Intel has engaged in tactics to get customers to back off from the K6. Earlier this year, AMD reached an agreement with Siemens for the K6 in certain PC lines. The deal was called off, he said, after the German PC manufacturer got "the call" from Intel. "We had a deal with Siemens but then [Intel] got to them."

But there are plenty of bright spots. AMD is expected to begin supplying IBM with faster versions of its K6, including a 300-MHz version, according to sources.

Sanders also pointed out that the once-unassailable facade of Intel appears to be cracking. The chip giant has not come up with a compelling answer for the sub-$1,000 PC market. "Intel doesn't have an answer for the $999 PC except to regress to the old Pentium," he said, adding that cutting prices on the Pentium II "is the only thing they can do."

"The Pentium II is a disappointment in the industry. It's an expensive infrastructure, and customers don't get that much performance for it," he added.

Intel counters this by arguing that its Pentium MMX processors, such as the 166-MHz version, are perfectly suited for this low-cost sector.

Last week, analysts reported that Intel would cut prices on the Pentium II in February and offer greater volume discounts on the chip in January. Drew Peck, an analyst for Cowen & Company, among others, attributed the price cuts to slower-than-expected sales of the chip.

As previously reported, AMD and Compaq have been in negotiations over an agreement to incorporate the K6 into Compaq machines. The sticking point in the negotiations, sources said, has been the low yields AMD has achieved on the K6.

Packard-Bell and Gateway 2000 are likely K6 candidates because IBM, Digital, and Acer already use it in a few PC lines. Hewlett-Packard uses the AMD K5 but no deals are pending with that company, according Robert Herb, vice president of marketing at AMD.

"There will be an opportunity with HP over time," he said. "I'd love to be able to sell to Dell, but they are a tough nut to crack."

That leaves Packard-Bell and Gateway 2000. Gateway's CEO, Ted Waitt, has also expressed frustrations with being locked into a monolithic Microsoft-Intel architecture.

Any AMD design win for the near future will be in the consumer space, Herb added. "We've done a good job of penetrating the consumer market. We're getting a beachhead for 3D." Corporate sales will be pursued but later in 1998.

Although AMD has been able to improve its yield problem to some degree, the company will still likely suffer financial losses for the quarter, Herb noted. Earlier, AMD had set a goal of producing 2 million chips for the quarter. Production at that rate would have resulted in a nominal profit, he added.