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AMD's window of opportunity

Advanced Micro Devices appears to have an opportunity to gain ground on Intel if it can supply the low-cost market.

Advanced Micro Devices is hoping to gain ground on Intel even as it continues to grapple with manufacturing problems and widening financial losses.

Like other firms in the computer industry, AMD is counting on the low-cost PC for a chance to gain market share. The company believes that providing inexpensive chips for low-margin systems is the path to improved fortunes.

Of course, it won't be easy. AMD today announced that revenues for the first quarter would "decline significantly" from the fourth quarter even while losses would "increase significantly". Like Intel, AMD partially blamed the losses on price competition. (See related story)

The fourth quarter, moreover, was no winner. AMD reported a net loss of $12.3 million, or nine cents per share, on revenues of $613 million. The company lost money in the third quarter as well.

But in recent weeks, the beleaguered chipmaker has been able to boost manufacturing yields on its K6 microprocessor while sustaining demand, a hopeful sign.

"They've got orders, they just don't have the production," said Roger Kay, an analyst at International Data Corporation.

Both IBM and Compaq are considering expanding the use of the K6 in many of their low-cost consumer computers, other sources said. The company is also in discussions with retail vendors such as CompUSA to bring the K6 into the house brands of large retailers, which could drive up shipments.

AMD is also being helped by a weakened Intel, its arch rival. Intel's strategy for attacking the Intel's market fallout low-cost market apparently sprung two important leaks today. First, Intel today reported that earnings and revenues would fall well below earlier expectations for the first quarter, a development that some analysts have pinned on price competition. (See related story)

Second, Intel's first Pentium II chip made specifically for the sub-$1,000 market is meeting with a tepid response from computer vendors and processor experts. The so-called Covington processor, which will be the first of the new Celeron family of processors, will be more expensive than the AMD K6 without delivering discernibly better performance for many users, said Peter Glaskowsky, an analyst with MicroDesign Resources. (See related story)

Intel's sub-$1,000 product strategy probably won't start to catch fire until the second Celeron chip, code-named Mendocino. This processor cures many of the design problems of Covington and will cost $110 in volume. Mendocino, however, doesn't come out until the fourth quarter, or late in the third quarter, giving AMD two quarters to make gains.

Financial losses aside, AMD has made significant progress toward curing its manufacturing problems, Ashok Kumar, semiconductor analyst at Piper Jaffray, noted in an interview.

Earlier in the quarter, the company was able to isolate, and fix, one of the major manufacturing flaws with the K6. Last fall, yields on some K6 processors were as low as 20 percent, but now yields per wafer have jumped up to 160 chips out of a possible 340 per silicon wafer, or almost 50 percent. While improvement is still needed, the yield ratio is far higher than it was a few months ago. "50 percent is definitely a good starting point," Kumar said.

AMD is also showing progress in producing chips according to the more efficient and profitable 0.25 micron manufacturing process. Currently, about 1,000 of the 3,000 wafers started each week at its "Fab 25" plant in Austin, Texas, are made under the 0.25 micron process, he said.

Further, demand appears to be healthy. "Demand is not an issue," Kumar observed. IBM, which currently uses the K6 in certain consumer models, wants to incorporate the 233-MHz K6 in a $799 consumer PC and the 266-MHz version for its $999 PC during the first half. The company will offer Intel-based boxes for the same price, but the chips will be one speed level down. In other words, the 200-MHz Pentium MMX will be in computers that cost the same as 233-MHz K6 computers.

The sunny projections must be tempered with a realization that AMD still needs to bring up manufacturing volumes. Kumar also said that there are fewer additional computer vendors that are in a position to pick up AMD as a partner. Hewlett-Packard, Dell, Gateway, and Micron are unlikely partners.

Meanwhile, Intel will continue to stay very competitive on price.

Intel is an investor in CNET: The Computer Network.