Dell opts for AMD's Opteron

PC maker agrees to use Advanced Micro Devices' chips in multiprocessor servers by end of year.

Tech Industry
Dell has agreed to use Advanced Micro Devices' Opteron chip in multiprocessor servers by the end of the year, ending a long-standing policy of sticking exclusively with Intel.

The PC maker made the move public in its first-quarter earnings press release on Thursday. Speculation has mounted for years as to whether Dell would adopt the company's chips, despite Dell's exclusive relationship with rival Intel to this point. AMD has enjoyed a performance lead in server benchmarks over Intel's Xeon processors.

"We welcome Dell, and Dell customers, to the world of AMD64," Marty Seyer, an AMD senior vice president for commercial business, said in a statement distributed after Dell's earnings release.

Although the deal is confined to servers at this point--and it's not clear exactly when the servers will arrive, other than before the end of the year--it still represents another win for AMD, which has had a long string of gains over its rival. Intel's earnings and stock price have suffered in recent quarters, due in part to AMD's increasing market share.

Dell's decision to abandon its longstanding all-Intel policy comes amid less-than-stellar earnings for its first quarter. The results were in line with the warning the company provided last week. Revenue was $14.2 billion, up 6 percent from last year, but net income slid 18 percent to $762 million. Dell said it's no longer giving specific quarterly financial guidance, though it did say the second quarter should be similar to the first.

Earlier this week, company founder Michael Dell admitted the PC seller's performance over the last year had been disappointing. "I think there are lots of opportunities for us to do quite a bit better than we did last year," he said at the Future in Review conference Monday. "We didn't recognize how competitive the market was going to be." In hopes of getting back on the right track, Dell will accelerate plans for $3 billion in cost cuts and will spend $100 million on improving its customer service, CEO Kevin Rollins said Thursday.

The cost cuts will come from improving the efficiency of its support and manufacturing processes, Rollins said on a conference call following the earnings announcement. "We'll have the flexibility to price more effectively," he said, adding there are no plans for job cuts.

First embrace
Rollins said Dell's initial embrace of AMD will only involve servers with four processors--a relatively small category of the server market. There are no plans to sell AMD's chips in desktop PCs, notebooks or other servers at this time, he said.

"Our customers expressed a desire for that technology," Rollins said, referring to Opteron. "We will still be launching this year a broad base of Intel products."

In an interview later on Thursday, AMD's Seyer said that the company has been demonstrating its technology to Dell for years.

"I've replaced a third set of tires on my car going back and forth" over the past four years, he said.

Several times during the last few years, Rollins has hinted that the company was right around the corner from introducing products based on AMD's chips. Ever since AMD introduced Opteron in 2003, the processor has enjoyed an advantage over Intel's Xeon. During an extended period in 2005, server vendors Hewlett-Packard, Sun Microsystems and IBM were shipping dual-core versions of the Opteron processor, and Dell could offer only single-core Xeon processors.

AMD's progress on the Dell account, though, was steady. When AMD took over 10 percent of the market for Intel-AMD chips in early 2005, it was a pivotal point for establishing AMD's credibility among business buyers. Some government customers also began to specify that they wanted "Opteron or equivalent" servers in the bid proposals, Seyer said.

"In the second half of 2005, Dell's customers began to speak quite loudly about Opteron," he said.

Sources close to AMD, however, said a deal between Dell and AMD wasn't signed until this year.

Rollins said the decision was not related to the antitrust lawsuit AMD filed against Intel last year, in which AMD charged that Intel uses selective pricing schemes designed to provide incentives for its customers to exclude AMD from certain accounts, such as Dell. Intel has denied the charges, and Rollins said he doesn't expect Intel to penalize Dell for adopting AMD.

"Intel has been a great partner, and is going to stay a great partner. They are still going to (provide) the vast majority of our processors," Rollins said.

"We appreciate that Dell shows strong support for the bulk of our product offerings and belief in the strength of our road map," Intel spokesman Scott McLaughlin said in a statement. "The (four-way) niche has been a challenging one, but our next-generation Intel Xeon processor MP (Tulsa), shipping in the second half of 2006, will provide a competitive product."

Four-way, not two-way
It's interesting that Dell chose four-processor servers, rather than two-processor servers, for its first Opteron products, said Gordon Haff, an analyst at Illuminata. "If you're going to introduce an alien product into your line, logically you might do it where your highest volume is."

Although the four-way market only represents about 10 percent of the overall Intel-AMD server market, the servers represent about 30 percent of the overall revenue and are generally fairly profitable machines. AMD has also done particularly well in the segment. The company accounts for more than 40 percent of the Intel-AMD four-way boxes sold, according to various analyst figures.

In the overall Intel-AMD server market, AMD held a 26 percent market share in the first quarter, up from its fourth-quarter server market share of 16.4 percent, according to statistics from Mercury Research.

Several factors have helped AMD in this market, analysts said. The chips consume less power, Martin Kariithi at Technology Business Research said. It's also easier to build four-way servers out of Opteron chips because of their HyperTransport links, said Nathan Brookwood, an analyst at Insight 64.

"They were ready to do this several times," Brookwood said. Dell's recent market share declines, combined with the rise of AMD's market share may have toggled Dell over, he speculated.

Mercury Research analyst Dean McCarron said that a lack of AMD-based systems has hurt Dell in the server business, which, though a fairly small unit market, accounts for a disproportionate share of PC industry profits.

"They've been feeling a lot of competition from Opteron products from the other Tier 1 players," McCarron said, pointing specifically to IBM, HP and Sun.

"Presumably, it got to the point where Dell had to decide what mattered more--loyalty or trying to deal with the competition," he said.

"This is definitely a reality check for Dell," said Charles King, an analyst with Pund-IT. Now that the company has finally gotten on board with AMD, it will be interesting to see how the other server vendors adjust to the loss of an easy way to set themselves apart from Dell in the multiprocessor server market, he said.

While late to the market, McCarron said, Dell could still nab a piece of the Opteron server pie.

"This is a very competitive business," McCarron said. "The fact that they have lost market share doesn't mean that they can't regain it."

Meanwhile, Dell said in a filing with the Securities and Exchange Commission that it plans to sell up to $1 billion short-term unsecured notes, known as commercial paper.

AMD's stock rose 12.6 percent in after-hours trading Thursday, adding $3.95 to reach $35.50. Dell's increased 4 percent, or 95 cents, to $24.90. Intel shares fell 4.8 percent, or 91 cents, to $17.74.

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