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Commentary: Good news for PC buyers

Consumers should expect PC manufacturers to continue to streamline operations and decrease prices in what has become a strong buyer's market.

We believe IBM's decision to drop the use of Advanced Micro Devices' processors--which it never promoted heavily--from its PC lineup in North America and Europe is largely a cost-cutting move.

It is more expensive for IBM to support two separate processor technologies.

See news story:
IBM drops AMD in U.S., Europe
Last year, when the company launched its AMD-powered PCs, demand outstripped Intel's ability to produce processors. That changed as the PC market crashed in the fourth quarter and into 2001, to such an extent that Intel is now expected to cut the price of its Pentium 4 processor line by nearly 50 percent this month in an effort to stimulate demand.

IBM also sells mainly to the corporate marketplace, where AMD has never enjoyed much popularity. AMD has been successful mostly in the consumer and "white box" (custom-made PCs) markets, which focus on either price and performance or, in the case of the gaming market, raw power. In contrast, the corporate marketplace focuses more on overall system issues, including consistency across large desktop populations, and on vendor reputation. In this market, IBM does not want the cost of dealing with potential customer objections to AMD.

IBM also is trying to raise the cachet of its NetVista desktop line in the corporate marketplace to match that of its ThinkPad laptops. The ThinkPad is a leading big-business brand, and IBM can often charge a premium for it over competitive products. Although we doubt the NetVista will reach the same level of brand recognition and price premium, IBM certainly did not see AMD as helping these efforts.

Intel's increased availability--and its upcoming introduction of a less expensive Pentium 4 platform (with the 845 chipset)--certainly entered into IBM's decision. The chipmaker's move shows the continued dynamism of the PC processor market; Intel needs to compete hard even in slow times to maintain its dominance of the marketplace.

Despite the snub by IBM, AMD is still very much in the competition. Its long-standing, two-pronged strategy for survival has been either to provide superior high-end performance in comparison to Intel or to cut its prices to provide better price and performance. Last year, it got a boost during the processor shortage when large PC makers--notably Hewlett-Packard and Compaq Computer--built new consumer systems around its chips to meet market demand. However, success in the corporate market remains elusive.

We expect AMD to continue to follow these dual strategies, first by making its own dramatic cuts in the prices of its present processor lines in an attempt to hold onto its market gains and keep Compaq and Hewlett-Packard as major customers. We also expect AMD to turn its focus toward emerging small designs and more energy-efficient desktops, leveraging the work it has recently completed to enter the notebook market.

The main--and only near-term--hope for AMD in the desktop market is a dramatic increase in consumer interest in rich media. We believe that a number of forces, including the increasing availability of high-speed Internet connections and decreased prices for high-end processors, will translate into a dramatic drop in the cost of high-end PCs. Combined with the imminent introduction of Windows XP--which is designed to better support rich media--this will help to create demand. If it develops, the consumer PC market will pick up in the Christmas season, providing a respite from the present slump.

In the new year, PC and component vendors will have to look to the business marketplace for sales. Most large organizations have been slow to upgrade or replace their desktop systems to support a migration to Windows 2000, much less XP. However, better price and performance in new systems and an increased need to support rich media on corporate desktops could help speed what so far has been a very slow migration.

Both consumers and business users should expect continued aggressive pricing actions from semiconductor manufacturers and from the PC industry in general. They should expect the PC manufacturers to continue to streamline their operations and cut costs to support efforts to decrease prices in what has become a strong buyer's market. This will equate to lower prices and improved price and performance for PCs in the last quarter of 2001--good news for PC buyers.

Meta Group analysts Dale Kutnick, William Zachmann, Steve Kleynhans, and David Cearley contributed to this article.

Visit Metagroup.com for more analysis of key IT and e-business issues.

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