The response to Core 2 Duo: What does AMD do next?

Posted by Scott M. Fulton, III

Round Rock (TX) - AMD's first genuinely successful product in the PC CPU market was a product called K5. Far from its first processor, K5 was positioned as a price/performance competitor to Intel's Pentium. Later, AMD established a position for itself on the high-end as well, and even on the premium side of the price scale, as a performance leader. This was a strategy that would confound Intel's best efforts for nearly two years. But those periods of history are marked by the milestones of Intel's competitive responses, all of which drove AMD to new directions.

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"Historically, if you go back to periods when AMD has gotten above 20% [market share], Intel has responded viciously," related Shane Rau, research manager for the semiconductor group at IDC. "In 1998, it was a product response; that's when [Intel] introduced Celeron. That took back share. In 2001, it was a price war, through which Intel took back share and indeed drove AMD into the red. This time, it's a response based on both price and product. That level of response testifies to the strength of positioning that AMD has today, relative to those prior two periods."

Were it not for AMD, the Core 2 Duo series of processors that emerged from Intel yesterday would not be as strong as they are. But if history is any guide - and as history repeatedly teaches us, it is - then this is the part of the script where AMD digs in, reaches down deep within itself, and pulls out an overwhelming new advance in CPU architecture that everybody sees coming except Intel. AMD can no longer position itself as the "value alternative;" a company can't lead by being alternative.

"Going from 90 nm to 65 nm for [AMD] is kind of a slam-dunk, because when they actually make that transition, they've already got most of the solution already up and running."

Jim McGregor, editor, In-Stat Microprocessor Report

"The evolution of AMD is such that they became a serious player and innovator based on their ability to produce performance products," Rau told TG Daily, "so that they didn't have to compete solely on price. Now, while still a substantial portion of their desktop chipsets are in the value space - Sempron is upwards of 50-55% of their shipments on a quarterly basis - it's the high-end products, the FX, the Athlon 64, the high end and its ability to compete toe-to-toe with the Intel counterparts on performance, that allow them to be where they are today, to gain market share, to raise their ASP [average selling price], to increase their revenues."

Like Intel, AMD needs a premium processor not only to give itself a high-margin product line, and not only to prove its performance ability, but also to set the trend for the mainstream products which that premium line will inevitably metamorphose into, over the next two or three product cycles - which today is typically about 18 months' time. Today, right this moment, AMD has a harder time justifying its $827 FX-62 as a performance leader, especially when that performance is bested by an estimated all-around average of 25.8%, based on Tom's Hardware Guide tests, by Intel's Core 2 Extreme.

"The critical thing for AMD is, what do they do next?" asks Jim McGregor, principal analyst for In-Stat, and editor of the In-Stat Microprocessor Report. "They've got a really killer architecture. Their recent enhancements [include] adding DDR2, and manufacturing a revision that's going to allow them to do some mid-term enhancements with some frequency increases. So really, what's going to be the huge benefit in that? It's going to be minimal, it's not as drastic as what Intel has gone through."

A more granular scale of advancement

As McGregor explained to us, AMD's advances don't come in huge, thunderous waves like Core 2 Duo. Instead, they come in granular advancements that are smaller, but much more frequent. So "next" for AMD, with regards to the next few months, may be something fairly small and simple. "You have to remember that AMD's architecture still has room to increase frequency," he said. "Where Intel kind of ran up against a brick wall with their old NetBurst architecture, AMD still had room to go."

AMD has essentially been enhancing and revising the same basic AMD64 architecture it introduced in 2003, McGregor reminded us. That's not to say AMD64 is "aging" by any means; it's to say AMD was smart in planning so far in advance, essentially forcing 64-bit and dual-core technologies into the public vocabulary, and forcing Intel to follow. But can AMD go on just tweaking AMD64, without an entirely new architecture that blows Core 2 Duo out of the water?

"Historically, if you go back to periods when AMD has gotten above 20% [market share], Intel has responded viciously."

Shane Rau, principal analyst, semiconductor division, IDC

Jim McGregor believes, yes. The key, he said, is in how it responds to this notion that just because it has yet to complete its transition to 65 nm lithography, while Intel is humming right along at 65 nm today, it has fallen a year or more behind Intel. AMD is nowhere near that far behind, McGregor explained, if you look at the way the two companies engineer their manufacturing processes.

"Intel has kind of a brute-force method," said McGregor, "where they come up with a process, and all at once, they try to transition every product to it, and make the product run on the process. AMD and the rest of the industry (that doesn't have the capacity that Intel does) do more of a subnode solution, where they continuously upgrade the processor subnodes, instead of all of one standard node. The 90 nm represented some changes; they'll have one or two subnodes that enhances the transistor design, or changes certain things in the process technology, or maybe introduces new material, before they go to 65 nm. They're continuously upgrading it.

"So going from 90 nm to 65 nm for them is kind of a slam-dunk," McGregor proclaimed for AMD, "because when they actually make that transition, they've already got most of the solution already up and running."

These aren't architectural or design changes that McGregor is referring to, but manufacturing process changes, some of which may actually be made on the spur of the moment, on the fabrication room floor. Changes are made to such things as gate oxide thickness, or the composition of the doping compound, he said, that come together to improve yields just a bit more each time. "There's two ways to skin a cat," he remarked, "and there's advantages to doing it Intel's way." With multiple fabrication facilities, all running in tandem, there's advantages to being able to formulate a precise process so that all the fabs build products with equivalent performance. "But when you're somebody that's got limited capacity, or maybe only one fab running a particular product, for instance, then you want to make sure you've got maximum flexibility to optimize for yields [and] for performance."

But does this really lead to improvement in product composition and performance on the order of what AMD needs to compete with Intel today? It was process refinement, McGregor said, that enabled AMD to eventually produce Turion processors - in essence, forking off one line of processors from a production process standpoint, and adjusting their operating parameters. Intel would not have been able to make similar adjustments, he said, because there, the manufacturing process is fixed and often immutable. "Intel sticks to one process, and makes everything run on it. AMD optimizes the process for each product. There's a finer granularity of control in manufacturing."

All of which comes down to that big shift AMD will eventually have to make: the change to 65 nm. "You can't just sit there and say [AMD's behind overall] because they're behind in the manufacturing process," proclaimed In-Stat's McGregor. "That's not really true. Bringing up 65 nm for them is a lot easier than it is for Intel, because Intel tries to put all their changes into that transition. AMD doesn't. AMD continuously works in different technologies throughout the process lifecycle so that it's not bringing up a new process with all these changes, all at one time, which inherently is going to create a boatload of problems."


The new kingmakers

Continuous process refinements could also lead to an "FX-65" or a similar processor, which takes over the high end of the FX product line, allowing AMD to scale back FX-62 prices. Furthermore, such an FX introduction could be entirely separate from AMD's double-dual-core platform, code-named "4x4," whose announcement may be forthcoming in the next few months.

But until that time, how many months can AMD afford not to have a direct competitor to Core 2 Duo, in a product category that most will concede AMD effectively created? "They founded that segment," said IDC's Shane Rau, speaking about AMD and the high-end, enthusiasts' segment of the market. "When they came out with the FX products, they founded a segment that Intel then had to react to with the Pentium 4 Extreme Edition. That validated what AMD had done. AMD did this by leveraging things that, at the time, Intel was kind of pooh-poohing, [including]64-bit technology. Intel was taking its time towards going 64-bit; AMD grabbed it, rode it, and said, 'Here's a place to differentiate, and here's a segment that we can create, where we can really benefit from 64-bit technology.' So I think they would probably want to defend this niche ... aggressively. It's a kingmaker, it's a trophy kind of segment."

"I think the enthusiast segment is arguably what has enabled AMD to rise in market share, and become a more viable and innovative competitor."

Shane Rau, principal analyst, semiconductor division, IDC

But most importantly, the technology that enters the enthusiast end of the market "waterfalls" down, to use Rau's term for it, into more mainstream segments over a few product cycles. How distinct a manufacturer fashions its high-end product will inevitably determine how well that same product will distinguish itself in twelve to eighteen months' time.

"I think the enthusiast segment is arguably what has enabled AMD to rise in market share," professed Rau, "and become a more viable and innovative competitor. Their roots are in value processors, and competing on price. If they just compete on price, then Intel - which has more market share - can largely control pricing, and bring the boom down on AMD. That's what they've done in the past, like in 2001. So AMD needs to differentiate. One way you differentiate is on performance."

Can AMD's usual differentiation strategy work yet again, this time against its most formidable competitor to date? Rau believes it can, due mainly to how well AMD has already positioned itself not just in the enthusiast market, but in multiple markets. In servers, according to IDC figures, AMD's Opteron line has now captured 22.9% market share against Intel's Xeon. That fact alone has enabled it to remain strongly competitive against Intel, in a market the latter company still officially dominates. And just today, HP announced it would continue to use Opteron processors in certain of its workstation products, when it had every opportunity to switch to Core 2 Duo.

Just by entering a market, Rau believes, a reputable player automatically gains 10% share. If it plays its cards right - as AMD apparently has - it can garner 20% or more. So multiple markets have a cumulative, beneficial effect for a company. "If you keep stacking up markets that you're in," Rau said, "you're hedging your bets. You're increasing your exposure to multiple markets that you can draw nourishment from. You're begging your competitor to beat you at all places, and likely they can't. So by hedging its bets, AMD, I think, is guaranteeing itself a level of security."

"[AMD] provides a value proposition. It's got good performance, it's got reasonable price, it's got longevity that is a promise that the product will be available over a long period of time. So I think AMD can defend itself," pronounced IDC's Rau.

"At 125 W of processor power, [AMD 4x4] is basically going to melt down half of New York."

Jim McGregor, editor, In-Stat Microprocessor Report

We're entering a critical sales period for the year: the back-to-school period which OEMs perceive as second only to the holiday season. "This is when design win decisions are being made," said Rau, when OEMs decide which manufacturers to go with, and how much to invest in them. When a corporation like Intel has a new and triumphant architecture like Core 2 Duo, it's going to rack up some design wins. So as a competitor, you need to prove to your customers that you're still in the game, and you need to do that today. Cashing in your chips with multiple markets is one way - essentially leveraging the gains from one market to stay alive in the others, as AMD did today with HP. Another way is to maintain stature, and one certain way to accomplish that ... is to acquire a company.

"If you go back to the ATI deal, the timing of the deal may reflect this," said Rau. "Customers will now be assured that AMD is in it for the long haul in all of these segments, and will be a viable competitor, and therefore is worth investing in, in the long term."

All of this bodes well for AMD's upcoming 4x4 announcement, our analysts believe. It's probably nowhere near the performance-per-watt leader; AMD's already conceded that battle, at least for now, said In-Stat's Jim McGregor. "At 125 W of processor power, it's basically going to melt down half of New York."

But will the enthusiast market care? Probably not. "If you're going to buy a system from, like, Alienware, it's not going to be fan-cooled anyway," McGregor stated. "It's going to have some kind of creative cooling techniques: cooling pipes or liquid cooling, or something else. So really, it comes down to what is the raw performance of it? And I wouldn't say that AMD's [blown out of the water]; AMD's still got room to compete. We're not going to be at a point here where one's definitely going to dominate the other like AMD has over the past two years over Intel, but I wouldn't say that Intel's going to blow AMD out of the water, either ... at least not yet."

Complete Core 2 Duo launch coverage:
Intel is back: Core 2 Duo launches
Core 2 Duo Logo Intel aims to ship 1 million Core 2 Duo processor within seven weeks
TG Daily interviews Intel: "Core is changing the game"
Official: Intel releases Core 2 Duo, Core 2 Extreme
Up to $16,000: Core 2 Duo computers flood the Net
The long road to Conroe
Tom's Hardware: Core 2 Duo smokes AMD's Athlon 64 X2
Intel to launch Merom, Conroe on Thursday
Four AMD dual-core prices now at or near Intel price/performance curve
Technology Background: Will Intel's Core Architecture Close the Technology Gap? (Tom's Hardware)