Commentary: A matter of price

By Mark Margevicius, Gartner Analyst

IBM's decision to stop using Advanced Micro Devices processors was driven entirely by concerns about cost--the only thing that really matters to most buyers.

In recent months,

	See news story: IBM rattles AMD shareholders

price has clearly emerged as the key differentiator in the increasingly commoditized microprocessor industry. Performance is no longer a significant issue for most corporate and consumer computer users. In any case, products from Intel and AMD offer approximately equivalent performance--and any differences that do exist are essentially irrelevant.

AMD's value to manufacturers such as IBM has always been that it offered them a choice in an otherwise Intel-only field. For several years, AMD has been using that alternative status to chip away at Intel's dominant position, with the result that it now has roughly 20 percent of the PC market.

Most of AMD's success, however, has come from consumers and small to midsize businesses. Even though it offers a more consistent product road map than Intel, AMD has only lightly penetrated the high-margin corporate sector. The corporate IT buyer has generally remained faithful to Intel.

Then, just last month, Intel--which has always reacted aggressively to competitive pressure--slashed the prices of its Pentium-class processors. Suddenly, AMD's products, like those from upstart competitor Transmeta, were far less attractive to computer makers. AMD had offered the manufacturers a way to keep the processor business competitive and keep chip costs as low as possible, but Intel's aggressive new pricing strategy all but destroyed that value.

AMD has to be unhappy that IBM, easily the most recognized brand in the PC industry, is no longer using its chips, and the company must also be worried about other manufacturers following IBM's lead. Nonetheless, the decision is hardly a fatal blow for AMD. The company's products are still used by the majority of name-brand PC manufacturers--and consumers certainly don't need to replace them.

Nonetheless, AMD clearly must rethink its corporate strategy in the face of a radically changed marketplace. The company can't compete on the basis of performance or price, so it will have to find other ways--for example, by offering its customers superior service and support.

(For a related commentary on AMD's second generation of Athlon processors, see Gartner.com.)

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