Analysis: One small step for Dell, one giant leap for AMD

Posted by Scott M. Fulton, III

Round Rock (TX) - "Why did it take this long for two old boys from Texas to finally get together?" asked Jim McGregor, principal analyst and author of In-Stat's Microprocessor Report last night. "When you talk about the good ol' boys' network, it doesn't get any better than Texas." Yesterday, after years of speculation, Dell finally shook hands with its partner over the next hill, sealing the deal with AMD. For the first time, multi-processor servers carrying the Dell brand name will contain AMD Opteron CPUs.

It is not an across-the-board sweep for AMD with the Dell product line, so much as it may have been, from at least one analyst's perspective, an opening of the floodgates. Dell's acquisition, announced last March, of high-end PC system builder Alienware - one of AMD's high-profile customers - may have softened Dell to the notion of finally adding AMD processors in Dell equipment, believes Doug Freedman, semiconductor analyst at American Technology Research, who openly predicted this deal would occur as far back as last January. "I think that Dell's deal with Alienware was their way of warming the market up to the idea that they were comfortable selling systems with AMD-powered processors," Freedman told TG Daily.

AMD's Opteron processors will make their premiere in Dell's high-end, multiprocessor servers, it was announced yesterday during Dell's quarterly earnings report. We don't know the specific Opteron models, nor do we know yet how Dell will brand its AMD-powered units, or how it will price them. There's a good chance these details have yet to be worked out. TG Daily has contacted high-level representatives from both Dell and AMD for comment, which may yet come today.

"Should AMD have the best part for gaming systems, I think in the future, there's a chance that [Dell] may offer AMD boxes that are targeted at gaming."

Doug Freedman, American Technology Research

One of the founding principles of Dell Computer, going back to its days as "PCs Limited," advertising made-to-order systems from catalog-sized ad segments in Computer Shopper, is responding to customer demand. Customers in the high-end server market where Dell is now very well established - the #3 server vendor, by Gartner's estimates, behind IBM and HP - are demanding Opteron processors, as evidenced by the popularity of HP's ProLiant DL145 and DL385, IBM's eServer 326 and 326m, and blade servers with Opteron CPUs from both suppliers. By giving its customers the choice of AMD or Intel, Freedman believes, "I think what Dell has done is try to get a little bit back to their roots."

If that's truly the case, then why is Dell finding those roots in the server market, instead of the desktop PC market from whence it first sprouted? "Probably because [the server market] is the one place where AMD offers the largest delta in performance," answered Freedman. "I think...it's probably likely that Dell chooses to use AMD where AMD offers an advantage. Should AMD have the best part for gaming systems, I think in the future, there's a chance that they may offer AMD boxes that are targeted at gaming. But if Intel happens to have the best product at the time, I think you'll see them offer Intel solutions more heavily."

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Why Opteron, and why now?

Where Opteron has the advantage at present, analysts believe, is in multi-processor capability. Intel Xeon processors are somewhat competitive in the single- and dual-processor (1P and 2P) arena; but for customers that need to scale even further upward, not only is Opteron perceived as the clear leader, but it doesn't really have competition from Xeon.

"Even if you're in 1P, 2P today, if you ever perceive a need of going to [multiprocessing], you may want to stay with AMD just because you want that scalability."

Jim McGregor, In-Stat Microprocessor Report

The hole in Intel's product line in the multi-processor field was translating directly into a hole in Dell's product line. This is where AMD seized the initiative, as the only supplier that could possibly fill the gap. "Finally there was enough pressure on Dell," explained Jim McGregor, "that Dell almost had to go to AMD, because there was a hole in their roadmap, especially in their high-end solutions.

"Obviously, Dell's getting market pressure from two areas: from the market, and some of their customers that are requesting these high-end systems," McGregor continued. "Intel's still got a hole in their roadmap, and AMD's had a kind of a lead in this market for quite some time. Intel is fighting back, but their products that they're coming in with in Q3, still don't really address [their key segment]." It could be next year, he implied, before Intel catches up.

But doesn't that catch-up process have a big "Woodcrest" title painted all over it? Not in the "MP" field, McGregor believes. "AMD today has had a performance lead in server processors," he told us. "Woodcrest is coming up here in Q3, and may make a more competitive situation on the 1P and 2P servers for x86 solutions, but AMD's still going to have a performance lead in multi-processor solutions. So the real question is, what are your processing needs, and how scalable are they? Even if you're in 1P, 2P today, if you ever perceive a need of going to that, you may want to stay with AMD just because you want that scalability."

In other words, AMD's perceived lead in MP could give the company a significant advantage in 1P and 2P, just on account of the scalability factor. Customers often buy scalable systems, with the objective of leaving the door open for themselves to add more processing power later. Even if Intel's 1P and 2P Xeons hold their own in performance against Opterons, if they can't scale up, many customers may reject them...even if they end up never scaling up after all.

Of course, Dell can only capitalize on AMD's scalability advantage if it also offers 1P and 2P Opteron-based systems. If it only plans to offer Opteron on MP servers, as some comments from yesterday's conference call suggested, then at least for the time being, HP may be perceived as the vendor with the broadest range of customer options. Giving HP the lead in a market that Dell just now cast a broader spotlight upon, may pressure Dell into offering a 1P or 2P Opteron-based server, either immediately or eventually.

"I think if you look at customer choices in enterprise spaces, [or] even in any technology space," explained Doug Freedman, "if you have a supplier that's shown an ability to produce a product that's superior - whether this generation is superior or the next generation - you want to have a relationship with them so you have access to that technology when and if it does end up turning out that the next generation is that way. In a way, they should have a relationship with AMD just because the past performance of their products was better."

"In a way, [Dell] should have a relationship with AMD just because the past performance of their products was better."

Doug Freedman, American Technology Research

In a best-case scenario for Intel, Freedman suggested, Woodcrest processors could close the 1P and 2P performance gap with Opteron. That might trigger the next wave in the performance battle, with AMD introducing its own next-generation architecture later this summer. Again, weighting the scenario in favor of Intel, AMD would only gain a slight performance advantage over its predecessors. But if Dell didn't offer consumers that choice, it could still suffer, Freedman explained, "because they haven't had a relationship [with AMD], is always behind the eight ball, never able to ramp and introduce those products because they're just not part of the supply chain.

"I think what [Dell is] accepting is the fact that performance, in the future, could possibly flip-flop back and forth between the two," continued Freedman. "And that's very healthy for the market, and the consumer wins. If that's the case, you need to have a relationship with both, so that you choose the processor that works the best for the application that you're trying to serve."

With the server product lines from HP, IBM, and Dell all beginning to balance themselves out, McGregor believes, Dell could capitalize quite significantly on its skills in managing and relating to customers. All things being equal, customers will start looking for those things that aren't equal; and in Dell's case, that could be the service agreement.

"For the basic decision makers in the IT department, [the deciding factor] has to do with the service agreement," said McGregor. "Sometimes the cost of the service agreements definitely exceeds the cost of the units themselves. So then you start looking at reliability, vendor qualifications, and the outsourcing model where companies are going to look to companies like IBM, EDS, EMC to provide those services rather than going in-house. When you go to the third-party model, it's completely up for grabs."

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The next challenge: Distinguishing AMD and Dell in a new market

If Dell can distinguish itself in servicing high-end servers the way it's already distinguished itself with customer service in the field of enterprise PCs - where its customer satisfaction rankings remain high - then that factor, coupled with the AMD choice, could win Dell some market share, at least boosting it from a close third place to a very close third place.

"How quickly will [Dell] follow this up with the possibility of a desktop or notebook product, powered by
AMD?"

Doug Freedman, American Technology Research

Whether Dell can distinguish its new Opteron servers in terms of price remains to be seen. In the PC field, AMD desktop and notebook systems typically have lower prices than similarly equipped Intel systems, although the price gap has narrowed a bit recently. But Opteron processors don't share that same price advantage; indeed, in some cases, they're quite expensive.

Not that Dell doesn't already have a problem with low margins, McGregor told us. "One reason Dell is taking a hit is, [in order] to maintain their market advantage, they've been dropping their price significantly. Now, Dell obviously has some room to play, because it has significant manufacturing advantages, in terms of cost. But that starts hitting on your margins, and eventually that's going to catch up with you, especially when Wall Street gets a hold of it. It sets an expectation: AMD's up there in terms of price, and in terms of performance."

For Dell, finding the right price point for its Opteron servers may be a challenge - quite possibly, one it's still working through. Its existing customers may already expect AMD options to have lower prices, which won't be the case with Opteron MP units. If Dell shaves its margins to remain price-competitive, its investors could punish the company next quarter, as they have in the past.

The relative success of Dell's quest for the proper price point could determine how soon the company is likely to employ AMD processors in other classes of systems. "I think the question on most people's minds," Freedman forecasts, "is going to be how quickly this migrates from high-end servers into the volume, mid, and low tier, where Dell really does most of their volume in the server market. Then the next question will be, how quickly will they follow this up with the possibility of a desktop or notebook product, powered by AMD?"

Jim McGregor pointed out some often unseen factors in Dell's dilemma. On the one hand, he said, it would be foolish for a company with Dell's reputation not to offer its customers the widest possible array of choices. But in the past, Dell has enjoyed a very profitable relationship with Intel - a relationship that included lucrative co-operative marketing agreements between the two companies. Without Intel exclusivity, Dell could be losing one source of revenue, which in the past may have helped compensate for Dell's not having offered alternative AMD-based products. He implied that Dell may have had to acquire Alienware, among other reasons, just to help ease Intel's transition toward finally realizing the inevitable.

The next challenge, however, rests on the shoulders of AMD, McGregor believes. The company has successfully branded Opteron, Athlon, and to a lesser extent Turion in the public mind, but "AMD" as a brand still stands for "low-cost" and "second-tier" - leftover remnants from the era when it basically cloned Intel x86 architecture. As McGregor stated, "I think the challenge now is rebranding AMD as not the second source or the low-cost solution, but the alternative solution."

This rebranding could be a very tricky operation. "AMD doesn't have the marketing or the funding that Intel has," McGregor said. "So that's definitely something of a disadvantage. Once you communicate a brand, you don't own it. It's the customers that own it. Influencing or changing that brand is a very difficult thing. It takes a lot of time, and usually a lot of money."

"AMD doesn't have the marketing or the funding that Intel has...So that's definitely something of a disadvantage."

Jim McGregor, In-Stat Microprocessor Report

AMD has some strengths it can fall back on, McGregor added. One is the fact that it is solely concentrated on the microprocessor field, while Intel has a number of industries it deals in. Perhaps because of this, companies like Nvidia and ATI have an easier time doing business with AMD, and are more eager to work with it in advancing their mutual aims, such as innovating PC architectures. Also, several years ago, AMD started building multicore, multi-processor features into its single-core architectures, easing the transition to multicore while forcing Intel to make hasty, and sometimes interim, innovations.

In moving to more upscale markets, AMD made the right first choices, including aiming not for enterprise PCs but for servers, McGregor explained - and it was this choice that won AMD the Dell contract. "It's probably the smartest thing they did," he said, "because that puts them right in the face of IT managers. It's a lot easier to possibly get into the enterprise PC [market] once you've got the servers, than the other way around."

With two new fabrication facilities in Germany, and a technology sharing agreement with Charter Semiconductor, on top of all AMD's other strengths, now may have been the perfect time for it to strike a deal with Dell. Maybe the contract itself could be the catalyst for the rebranding effort AMD needs. "I think some of the barriers that may have been there," stated McGregor, "in terms of AMD's viewpoint before, have been removed."

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