For Dell and AMD, a tantalizing question

ROUND ROCK, Texas--Will Dell take the AMD plunge?

One of the chief questions in the PC market for the next couple of years will be whether the computer maker will incorporate Opteron or Athlon chips from Advanced Micro Devices into its systems. Intel's release of chips that can provide a similar 32-bit/64-bit functionality--one of the key factors of Opteron's popularity--has likely tabled the issue for now, according to several analysts.

But there are other factors at work, too. AMD is gaining customers in the corporate world--20 of the Fortune 100 have installed Opteron servers. The Sunnyvale, Calif.-based company has also shown that its technology can equal and even best Intel's.

Dell certainly has good things to say about AMD. In interviews with CNET News.com editors and reporters at the company's headquarters here last week, numerous executives extolled the strides the Intel rival has made in designing and manufacturing server and desktop chips.

"AMD has been getting much better at turning out their technology, and their technology has improved," said Kevin Rollins, Dell's CEO.

"We see the technology gap closing," added Jeff Clarke, senior vice president of the Dell Product Group, who noted that AMD came out with the first 32-bit/64-bit chips and may beat Intel to the punch with the release of dual-core processors that will significantly boost performance in servers. "You could argue that in those two particular cases, they (AMD) are leading," he said.

Then, as quickly as the compliments come, Dell executives list a host of reasons why the company won't make the move to AMD, sounding somewhat like a person who likes the sound of escargot but doesn't want a plate full of snails. The executives say few of Dell's customers are asking the PC maker to offer Opteron-based servers, and Dell continues to grow far faster than its competitors. Business buyers tend to be more comfortable with Intel chips, given Intel's powerful brand and historical ability to mass-manufacture processors.

"We still don't see a strong demand from our customers, and nothing has changed about our strategy going forward," said Steve Felice, vice president of Dell America's Corporate Business Group, who manages relationships with the Fortune 2000.

Adopting AMD chips would also require that Dell design and build new lines of computers, adding cost and production complexity. For a company that devotes resources to shaving seconds off the length of time it takes a factory worker to pull parts out of a bin, that's not good.

"We're the most successful PC company on the planet and we don't have AMD," Rollins said.

The CEO himself emphasized that he has no interest in handing AMD a symbolic victory by using the company's chips in a low-volume model.

"Could I do it?" he asked rhetorically. "Yeah, but why?"

Additionally, AMD gives Dell a lever. Sources say Dell has been on the verge of deals with AMD a number of times, only to back away late in the process after wringing concessions from Intel. (Microsoft similarly awarded Intel the Xbox contract at the 11th hour.)

"They have come close many times. Dell has profited tremendously from AMD participating in the process, without ever having to deal with AMD," said Nathan Brookwood, an analyst at Insight 64. "I think of it as Lucy holding the football for Charlie Brown."

On the bright side for AMD
But the tide could be shifting toward a stronger Dell-AMD alliance, if slowly. AMD has increased its share of the market for server processors in the past few quarters. New customers include America Online, Merrill Lynch, Bell Helicopter and Credit Suisse First Boston.

"We do have discussions with them, and they have been ongoing for years," said AMD spokesman Dave Kroll. "Dell has always been a great customer-focused company. We believe Dell will do the right thing--we just don't know when."

In servers with four or more processors, AMD also enjoys a substantial cost advantage--something near and dear to Dell's way of doing business--because of HyperTransport, an AMD-inspired interconnect technology that Intel has not adopted, according to Brookwood and others. HyperTransport doesn't get nearly the same attention as 32-bit/64-bit functionality, but so far this feature has been more important in the benchmarks Opteron chips have posted.

The smaller company will also come out with dual-core Opterons in the second half of 2005, while Intel won't pull off the same trick with its Xeon processor until the first quarter of 2006. In reality, being first to market won't likely tilt the needle much, but it could build confidence for AMD. The AMD chips also have the potential to perform better than the Intel counterparts because of the input-output data channels.

"AMD would become more attractive if they (Dell) were at a clear technical disadvantage," said Dean McCarron, an analyst at Mercury Research.

The tight relationship between Dell and Intel is difficult to underestimate. As the largest Intel customer, Dell enjoys the steepest volume discounts and largest portion of market development funds. Even if Dell started using AMD chips, the company would likely still enjoy these advantages--veering from its uniform pricing schedules potentially could prompt an antitrust investigation into Intel.

But the Santa Clara, Calif.-based chip giant does provide extras to Dell. It has also helped design chipsets and built Itanium-based computers on Dell's behalf to get the PC maker to adopt Intel's technology.

Earlier this year, Intel settled a lawsuit with Intergraph that insulated Dell from liability, though not fellow defendants Gateway or Hewlett-Packard.

Culturally, a bond exists as well. Dell uses the "two in a box" management structure--putting two executives in charge of one department--that has been commonplace at Intel for years. When he penned his business biography "Direct From Dell," founder Michael Dell retained the same co-author that Intel's Andy Grove employed to help him write "Only the Paranoid Survive." The blue and ivory buildings with jutting bays on the Dell campus are eerily similar to the ones on Intel's Santa Clara campus.

Getting closer all the time?
Despite the fact that both AMD and Dell are two of the largest tech companies in the Austin, Texas, area, Dell has only begrudgingly warmed to AMD. At Comdex in 1997, Michael Dell and AMD founder Jerry Sanders ran into each other briefly on the show floor. The two shook hands and smiled.

A few moments later, Dell walked over to CNET News.com reporters and said, "The problem is that these guys (AMD and another chipmaker, Cyrix) always come in at the end of the cycle. What's the point?"

Starting in 1999, IBM, Gateway, Compaq Computer and others began to adopt the first Athlon processors in consumer desktops, renewing, or in some cases opening, a relationship with AMD. Dell did not. Subsequently, price cuts by Intel prompted many of these companies to drop their AMD boxes.

A slight thaw, however, seemingly began to take place in 2001 and 2002. During those years, Michael Dell and other executives began to state publicly that the company tested AMD parts in its labs. Previously, Dell would often officially decline to discuss the subject.

Dell executives also began to publicly and privately question Intel's Itanium chip, and Dell initially declined to adopt the Itanium 2. Meanwhile, they started to make positive statements about the coming Opteron chip. In April 2002 at a Merrill Lynch conference, Dell and Sanders shook hands and chatted with each other for a while after a speech by Dell.

"We're very interested and we're looking (at Opteron) and there's not much more to say about it in public," said Dell.

For his part, the flamboyant Sanders made a bold prediction that same afternoon. Dell would adopt Hammer, the code name for Opteron at the time, or Intel would come out with a chip that could also perform the same 32-bit/64-bit functions. About six months earlier, Sanders called such a chip from Intel "my worst nightmare."

Unfortunately for AMD, the second half of the prediction came true. After asserting several times that it would not come out with such a chip, Intel in February 2004 announced that it would put 64-bit functionality in Xeon.

"Had Intel not introduced the 64-bit technology when it did, that might have pushed Dell over," said Brookwood, who noted that Intel demonstrated its first 32/64-bit chips on a Dell workstation.

Still, things may be lining up for AMD. Benchmark testers and, more importantly, customers like Sandia National Labs give Opteron high marks. The technical advantages, while modest individually, may begin to accumulate.

And Dell continues to provide optimistic statements about AMD.

"They have been doing better," said Rollins, "than they ever have done before."