Analyst Opinion - Dell’s announcement that it basically is dropping AMD from its direct sales site got me scratching my head? Was this part of a plan to drive AMD’s stock price down to make it a more attractive acquisition target? Conspiracy theories were popping up everywhere, but before I even suggested such a thing I figured I’d better talk to a few folks. Turns out it is all about market share.
What really had me thinking about this was that Dell apparently was trying to prep AMD for sale. Otherwise, this announcement didn’t make any sense. Dell did not make a big buzz when they changed networking or hard drive vendors. So why would they announce they were changing chip vendors if it wasn’t for the purpose of driving AMD’s stock price down?
As it turned out, Dell never intended to announce this at all. Evidently, in the calm after the Yahoo/Microsoft storm, a reporter noticed that AMD had dropped off the choice list for Dell’s on-line ordering site. The result was that Dell chose to announce this move to make sure that the message stayed in control and avoid interpretations that Dell is abandoning AMD altogether, which isn’t accurate. You can view this announcement as a favor to AMD, providing damage control.
Of course, I’m sure that both companies would have preferred that the deletion of some AMD systems on the Dell Direct website would not have made headlines at all. In the end, this means the goal was not to turn AMD into an attractive acquisition target, though that may have been one of the rather unfortunate results.
Why direct and not retail?
But the question remains: Why did Dell cut AMD on their direct site and maintain them in retail? This decision really comes down to two things: In retail, you build to the retailer’s order and retailers use AMD to hit certain price points with Athlon that Intel Core Duo can’t hit. And we know that most retailers don’t want to use Celeron or Sempron processors. Retailers order by the thousands and it is no secret that AMD is competitive particularly at the low end.
On the other hand, Dell’s direct business is based on a configure-to-order process. If Intel and AMD were plug compatible, Dell would still be selling AMD through its website. But when you select AMD over Intel, Dell has to pick another motherboard typically with a different chipset, graphics system, as well as wired and wireless networking systems. This is not only a headache with regard to stocking core systems (case + motherboard), it is especially a problem with qualifying, testing, and supporting the unique operating system load.
AMD typically sits at about 20% of the overall market, which simply isn’t enough for a direct business. Dell can only support AMD with a profit, if AMD reaches a higher share – and, for some time, AMD had a higher share. In a way, this shows why it AMD engaged in the price war with Intel and why it paid such a high price for market shares. At this time, Dell isn’t seeing the volume from their direct business to support the extra costs of inventory and support. For now, they have dropped AMD off that side of their business.
Why not drop AMD altogether?
Dell, as well as the vast majority of other vendors, wants AMD in the market so Intel doesn’t become a sole source provider.
It is the competition with AMD, they believe, that is making Intel more responsive to their needs of late and driving prices for processors down. Dell in particular doesn’t want to go back to the days when Intel wasn’t listening to them and will likely do all they can to keep AMD afloat. In addition, AMD remains competitive in certain segments and currently appears to enjoy a closer relationship with Microsoft than Intel does, which means there are strategic advantages in staying close to the company that has many of its executives in close physical proximity to Dell.
Dell isn’t going to let them go. Having made the move to AMD, they are evidently in this for the long haul and will likely recommit to AMD on Direct, if and when AMD’s offerings are once again demanded in higher volumes by direct buyers. This outcome is certainly a possibility if AMD/ATI can execute to plan.
We are still waiting to see the full benefit of the ATI/AMD merger. At the current valuation, AMD is increasingly in danger of becoming an acquisition target both of which could dramatically change AMD’s fortunes.
Intel continues to execute incredibly well though and isn’t going to give back share easily. AMD is far from being done; but to move back into the space they recently occupied, they will need to dramatically increase the demand for their offerings from where it is today. If they can, Dell will likely increase its commitment along with a number of the other OEMs.
In short, AMD is down but far from out.