Vol 20, Issue 35

August 28, 2006

AMD Writes a New Chapter for PCs

By Jim McGregor

The future of PC processors and platforms took a sudden turn on July 24 when AMD announced the acquisition of ATI Technologies, the number-two vendor of graphics processing units (GPU) and PC chip sets. The acquisition signals a significant change in the battle between Intel and AMD over PC processors, as well as for the entire PC ecosystem. The number of high-end independent GPU vendors has shrunk to one: Nvidia.

A Huge Investment for AMD

At $5.4 billion, the ATI acquisition represents one of the highest prices ever paid for a semiconductor company—and a particularly hefty price for AMD. AMD is funding the acquisition with $1.7 billion in cash, $2.5 billion in long-term debt, and the remainder in AMD stock.

Although AMD's momentum in gaining market share appears strong through 2Q06, the company will quickly face stiffer competition from a completely revamped Intel processor line-up that boasts the highest performance at a lower power rating. In addition, ATI faces growing competition from Nvidia, which already boasts the highest performance in desktop GPUs. Despite the risks, however, the acquisition will unite a rejuvenated processor vendor with a chip-set vendor that holds leadership positions in several markets, including mobile PCs and digital TVs. Not only will it broaden AMD's product base, but it will also enable new levels of innovation in future processing platforms.

A Change in the Game

The key effect of the acquisition will be a change in the war between AMD and Intel. Intel has already begun an assault on the PC platform with its foray into graphics, chip sets, and other accompanying components. But with AMD also focusing on GPUs and chip sets, the performance, flexibility, and price of the entire platform will be the weapons in the new war.

AMD is planning to integrate a GPU into future processors for emerging markets, beginning in 2008. Given the changes in PC architectures and the growing transistor budgets with each new manufacturing-process node, however, it is likely that mainstream PCs could see processors with integrated graphics within a similar time frame or shortly thereafter. The AMD64 architecture is particularly well suited for integrating a GPU, because it already integrates a crossbar switch and memory controller. This latest integration will increase the stakes in differentiating processors and platforms.

Ramifications to the Ecosystem

The market is already being affected by AMD's acquisition. Intel is shifting its promotional efforts from using ATI GPUs to using Nvidia GPUs for current and future PCs. This move brings into question the future relationship between Intel and Nvidia.

MPR believes it is unlikely that Intel will purchase Nvidia, because Intel already has its own graphics and chip-set development efforts, which appear to be gaining steam with every generation. However, it's not clear how AMD's move will affect Intel's existing relationship with Nvidia, which at times has been adversarial.

AMD's acquisition is also likely to spill over into the foundry market. TSMC currently manufactures ATI's GPUs, but AMD has its own manufacturing capability and foundry relationships, so the bid for ATI's business could become very competitive.

The Outcome

The acquisition faces many financial, organizational, and market challenges, but it also creates new opportunities for AMD. In addition, it marks a significant change in the battle over the PC. It's clear that the processor war is ending, and the platform war is just beginning. As a result, the entire PC ecosystem will likely face many changes that will require new levels of innovation to remain competitive.

(For more information about the acquisition and its ramifications for the PC market and its players, please refer to In-Stat's The Deal of the Year: AMD Acquires ATI, a new report that is part of In-Stat's PC Technology service.)