AMD makes severe price cuts

AMD?s K6, which offers performance that is on par with fast MMX Pentium and lower-speed Pentium II processors from Intel, was introduced back in April amid much AMD chest-thumping. "We believe we can do 30 percent of the unit volume of the Windows-compatible processor market," said W.J. Sanders III, AMD's chairman and CEO at that time.

AMD needs to take some pretty serious action to even begin to approach this figure, according to analysts, and that?s exactly what it proposes to do in this quarter, starting possibly as early as this month, according to Ashok Kumar, an analyst at Southcoast Capital, an Austin, Texas based marketing research firm.

Price cuts on its K6 processors will range up to about 50 percent, according to Southcoast, maintaining about a 25 percent price advantage over Intel, even after the chip giant?s expected price cuts in August.

Indeed, the first evidence of this surfaced yesterday when Digital Equipment announced price reductions of 20 percent on its business desktops with a 200-MHz K6 processors. The system is now priced just over $1,300 versus competing Intel products, which are about $200 more. Some resellers have also been selling an Acer 233-MHz K6 system for about $1,700.

AMD?s top-of-line 233-MHz K6 processor will fall to about $265 and the low-end 166-MHz version should drop to about $100, according to Kumar (see chart above). The K6 comes with MMX technology that boosts performance of certain multimedia software.

But the challenges AMD faces are formidable if it wants to take 30 percent of the Windows-compatible market, say analysts. With Intel supplying over 85 percent of a market that should approach 100 million units in 1997, AMD and Cyrix will scrap over the remainder. AMD should take about six or seven percent of the market this year and possibly 10 or 12 percent next year when the market is projected at about 120 million units.

AMD is being hampered in its competitive battle with Intel by two factors: economies of scale, which gives Intel plenty of leeway for making drastic price cuts, and brand name.

"I expect AMD to maintain its 25 percent price advantage on Intel, but that's going to really impact their margins," said Mario Morales, manager of semiconductor research at International Data Corporation.

Further, the drop in Intel prices make it incrementally more difficult for the company to land a major computer manufacturer. Intel MMX chips will likely be in sub-$1,000 computers by the fall, said analysts, leaving little incentive for computer manufacturers to look elsewhere. And AMD, all agree, needs to land another major PC manufacturer.

"A lot of people are looking at [the K6]. The issue isn?t just price, but also availability. Sometimes you don't get the product you need if you are not Compaq (CPQ)," said Kurt King, an analyst at Montgomery Securities.

"But [alternatives] become less appealing every time Intel cuts prices," he adds.

Daniel Kunstler, senior equity analyst at J.P. Morgan Securities, added that the recent Intel price cuts aren't even targeted at AMD or Cyrix. "These are designed to capitalize on elasticity in the market. I don't view the price cuts as predatory. AMD and Cyrix are not enough of a threat to them," he said.

"They have to look at these manufacturers who want an alternative to Intel in certain markets," he added, "but it's not going to get easier."

So far, Digital (DEC), Fujitsu, Acer, and Vobis, are the only major manufacturers using the K6. Hewlett Packard is expected to add a K6 Vectra in the near future, Morales said.

But brand name is also a deterrent to both buyers and PC manufacturers. Intel, according to some estimates, has earmarked as much as $1 billion this year for "Intel Inside" advertising. This is money essentially allocated to customers such as Compaq, Dell Computer, and Gateway 2000 for advertising their products along with a prominent display of the Intel Inside logo.

This is a major disincentive for PC manufacturers considering a competing processor from AMD. Some industry sources say it is stated, in no uncertain terms, that PC manufacturers within the Intel Inside campaign should not stray from the Intel fold to AMD. Intel denies this.

Brand name extends beyond the U.S. The pressure that comes from trying to meet Intel on price in the domestic market makes overseas markets a logical focus for AMD. A number of the K6 processors, in fact, go to clone manufacturers in Taiwan and Korea, according to Brian Matas, a market research analyst at Integrated Circuit Engineering, an analyst firm in Scottsdale, Ariz.

That, however, throws AMD up against the Intel brand name again. Even overseas, it remains a tough sell. "Cost can be a factor in Europe and the Far East, but people in Indonesia see what is selling in the U.S. [and want the same thing]," Matas said. "There is a perceived intangible when it comes to Intel. It's more than price. People question, 'Is the performance as good? Is the company as good?'"