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AMD is suing Intel. What do I think?

It’s like being a member of the Bomb Squad, and you get told there’s a nuclear device out there that has to be disarmed. You nervously go over to do your job, but find that the nuke is really just a hunk of plastic explosives. It’s certainly nasty, and it surely was necessary for you to be called in, but it’s certainly not nuclear.

That’s the problem with this case. Yes, it’s quite possible, even likely, Intel did some not-legally-kosher things to keep AMD down, but the case looks nowhere as big as the claims.

As this case slowly progresses, I’d bet it’s going to be like the case of a five-foot-eight white high school kid who can’t shoot or jump too well suing the black basketball coach of his school’s team for discrimination. Even if it’s true, that’s just an argument for getting rid of the coach, not putting the kid on the team.

AMD is going to be that kid claiming in court and to anyone and everyone within earshot, “I’m not on the team solely due to racism,” while Intel will be the coach downplaying the fact that he’s never had a white player on any of his teams, and emphasizing what a lousy player the kid is.

In other words, are Intel’s practices part of the reason why AMD isn’t so competitive? I wouldn’t doubt that. Is it the only, or even dominant reason? Hell, no. There are plenty of other reasons why AMD has problems against Intel, and rest assured Intel will point every single one of them out in any trial, in luscious detail.

Understand that there are both legitimate and not-so-legitimate reasons for AMD to press this suit. For instance, if you’re planning to greatly increase production capacity in the next few years, you hardly need Intel doing its damndest to freeze you out.

On the other hand, trying to convince the world that you’re really a super-duper company, and that all your failures up to now have been due solely to Big Brother Intel keeping you down and that AMD will explode with revenues and profits and be a huge success once the Evil Monopolist Intel has been put in its place, well, that sounds more like Oz talking.

If you read the complaint, especially the first part of it, it reads more like a PR release than a court brief. The level of self-praise found is irrelevant and inappropriate in a legal brief, but no doubt is aimed at the media. If nothing else, AMD obviously hopes to get a lot of free buzz out of this suit, both now and later.

They’ll get publicity alright, but I wonder how ready they are for the “Top Ten (or Fifty, or Hundred) Reasons Why AMD Is Lame” Intel will no doubt give them.

Again, it’s not that there isn’t a case here, but there’s a lot of BS clumped all over it to make it bigger than it seems.

Some of it is even unintentionally funny; one could summarize AMD’s arguments as “Your prices are too high, Intel, stop offering discounts!”

This is supposed to lower prices? Seems far more likely all this would do would be to allow AMD to raise its prices, if price really were the problem here, which it isn’t.

The Real Issue: Why The Fear Factor

Let’s talk about pricing for a while, because that’s the core of AMD’s case. These discounts, promotional expenses, whatever really aren’t all that much compared to what these companies are paying Intel; these companies are rolling over and playing dead for relatively minimal sums of money.

I would estimate that if AMD undercut Intel by 15% for an equivalent processor, that would cover the value of all these payments. Given that AMD processors usually sell at a greater discount than that on the open market, I don’t think price alone is the determining or even a terribly big factor when it comes to relative competitiveness in the OEM market.

I’m sorry, but I can’t see the heads of major OEMs being reduced to jiggling bowls of terrified jelly over losing a ten or fifteen dollar discount/rebate/etc. per CPU from a company that charges much more than the competition. Nor do I think AMD can plausibly claim that they can’t provide the necessary discounts.

What I think is really the fear factor is that Intel can threaten or actually play chicken with the major OEMs’ CPU supply, and AMD can’t step in at a moment’s notice.

To quote a former head of AMD in a quite different context, “Real men have fabs.” So long as Intel gets most of the x86 market by default simply because nobody else can make extra chips to replace Intel’s, you don’t and can’t have a level playing field at the big OEM level. All these payments do is push an already heavily tilted playing field a bit more over to the Intel side.

The real source of Intel’s power isn’t some piddling rebate or promotion support. The real source of power is that big guys have to buy most of their CPUs from Intel, no matter what. They can’t walk away from them and have some one else supply them.

It boils down to this: if Dell tells Intel one day they’re going to have some AMD models, and Intel says “Oh, really? We feel some severe production difficulties coming on, fewer dudes are going to be getting Dells,” Dell can’t tell Intel, “In that case, all the dudes will be getting AMD-based Dells.” AMD simply couldn’t deliver. That is the core problem; that is what frightens the OEM bosses so much. When push comes to shove, Intel can bluff and threaten, but the major OEMs can’t call them on it.

This is no big secret, Dell has pretty much hinted at this, and what’s true for Dell is true for the other big guys, too.

Getting rid of rebates and discounts won’t change that situation one little bit among the big dogs. It won’t make matters better, just nastier. Only a lot more AMD capacity will do that.

And that’s where we get to what this case is really all about.

Hector Bets The Company

As we’ve stated often in the past, AMD’s core problem is that Intel has money, and it doesn’t. As we’ve also pointed out before, the simplest way to take care of that problem is to sell out to a giant with both a lot of money and a desire to spend it against Intel.

AMD shows no signs of getting hitched any time soon.

What they have appeared to decide to do instead is try a “do or die” approach to become truly competitive with Intel.

Look at the recent talk about grabbing a third of the marketplace in a few years and 50-50 eventually. Talk about increased marketshare is cheap, but talk about building a third fab to make that possible isn’t.

How is an already financially-stretched AMD going to pay for all this, or get others to do it?

The lawsuit provides the last piece of the puzzle.

AMD plans to load up on debt or otherwise mortgage the company to build the fab capacity necessary to let OEMs call any Intel bluffs, and will use the lawsuit as a sort of collateral to convince people with money to back a soon-to-be winner.

This is a very risky course of action to take on a shoestring, simply because the problem with a “do or die” strategy is that if you don’t do, or don’t do fast enough, you die. You have no fallback if things don’t quite work out the way you want, nor do you have staying power if things take longer to work out your way than you had planned.

What we don’t know yet (and may well not know until it is too late if things don’t work out) is to what degree AMD will bet the company on a lawsuit win. It’s one thing to sue Intel and hope to get some benefits from winning; there’s nothing wrong with that. It’s quite another to essentially put up the lawsuit as collateral to borrow billions more to build/retool more fabs, then needing a big win (a big check from Intel and/or a much bigger market share) to pay that bet off.

There’s obviously a huge payoff if everything works the way AMD would like, but what happens if that doesn’t quite happen?

If the big pay-off doesn’t happen, or doesn’t happen fast enough and soon enough, the house of cards they’ve built will collapse. You can’t pay off billions and billions in debt with just millions in profits.

This situation reminds me of the old case of the United States Football League. This was a football league set up in the early nineteen-eighties, one that played in the spring rather than the fall.

This league sued the National Football League for $1.69 billion on antitrust grounds. To make a long story short, they needed to win the lawsuit big time to stay in business. Well, the USFL eventually “won” its lawsuit and was awarded . . . $3 in damages (plus, eventually, legal/court costs). The USFL effectively went out of business a week later.

One might also recall that the Microsoft case didn’t exactly do the suers a whole lot of good, either.

It isn’t wise to think that winning a lawsuit will solve all your problems, or pay off your bets, even if you’re right.

Ed

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