Gateway, AMD negotiating on K6-2

Gateway is negotiating with AMD to include K6-2 processors in one of its desktop PCs, sources said. A Gateway K6-2 computer, if it came to be, would in all likelihood appear in Japan or another overseas market first, while AMD-powered Gateway PCs would appear later, if at all, in the U.S.

The current negotiations mostly focus on the K6-2 rather than the upcoming K6-3, sources said. As reported earlier, negotiations over a K6-2 deal took place in October and in 1997 as well.

Although the two companies seem close to finalizing a deal, analysts, and even sources close to the companies, cautioned that a deal between these two companies can't be guaranteed until it is announced. Gateway has held numerous negotiations in the past, and fully tested AMD processors on Gateway PCs in their labs, only to return to the Intel fold.

Some have speculated that Gateway uses the existence of the negotiations as a way to wring pricing concessions out of Intel. The saga has become "the Monica Lewinsky and Bill Clinton" story of the PC set, said Ashok Kumar, semiconductor analyst for Piper Jaffray.

Launching an AMD-powered system overseas could pave the way for Gateway to accomplish a number of strategic objectives. With a K6-2-based system, Gateway could lower its overall cost, leading to higher margins or better competitiveness in terms of price. The existence of an AMD relationship could also be used to get future pricing concessions out of Intel, said Dean McCarron, principal analyst at Mercury Research.

"Gateway is learning what Compaq learned, that it is a lot easier to wring concessions out of Intel when AMD is around," McCarron, adding that introducing K6-2 boxes first in a foreign market makes sense. "It's a significant win psychologically in the sense that Gateway and Dell are viewed as Intel-only vendors. From a sales perspective, it could go either way. We're entering into a real war for various segments of the PC market."

At the same time, by offering the systems outside of the U.S., Gateway reduced the risk of hurting its Intel relationship.

Longtime Intel allyToshiba earlier this year released K6-2 based notebooks for the Japanese market, but not the U.S. market, while Sony launched a similar Japan-only strategy with AMD earlier in 1998.

Even if a deal goes through, others believe that it won't lead to a widespread relationship between the two companies. Intel has launched an all out price war in the low end against AMD. Celeron processors now sell for as low as $71 in volume and will be cut again, Kumar said.

Keeping up with these price cuts will be difficult. Further, by increasing volumes of AMD processors, Gateway will have to start paying higher prices for Intel chips, because its volumes with that company will start to decline.

"No-win situation for Gateway"
Second, coming to terms on a K6-3 deal won't be easy, Kumar added. AMD has said it wants to sell the chip for close to a $100 premium, which eliminates the cost advantage of going with the company. The K6-3, in fact, was slated to come out around this time, but has been delayed until toward the end of the quarter, because PC makers have balked at the price.

"This is a $40 opportunity for AMD and a no-win situation for Gateway. The K6-2 will probably only be around for one or two quarters," he said. 'They can't afford to incur the wrath of Intel."

Huge discounts on the K6-3 may also be unlikely, at least initially, added McCarron. "They have to get a premium on that. They won't make it as a company otherwise."

Both Gateway and AMD declined to comment. Interestingly, however, AMD has recently hired a public relations specialist for retail and direct sales.