AMD, Intel Margins Suffer on Price War

By Jessica Davis -- Electronic News, 10/24/2006

With Advanced Micro Devices and Intel engaged in an epic battle for market share, technology represents only one of the fronts of the war.

Another front, microprocessor pricing, has been putting pressure on average selling prices (ASPs), revenue and ultimately the profits of both companies. The result is a price war.

“Right now there is definitely a price war,” said Rob Enderle, president and principal analyst with the Enderle Group. “If you watch the financials with regard to AMD and Intel they are both being hit massively by price war.”

Indeed, Intel noted in its earnings release last week that while total microprocessor unit sales were higher, ASPs were lower. And financial analysts warned that while many factors were starting to look up for Intel, including the unit cost reduction it will get from the 45 nanometer process ramp in the second half of next year, price pressure could put a damper on things.

“The factor to watch will be pricing, which could naturally derail margins – but recent price stability provides encouragement,” said Chris Caso and Elizabeth Pate, analysts with FBR Research in a report following Intel’s recent earnings announcement.

Intel’s desktop segment experienced the most pressure on microprocessor price during Q3, the company noted.

And AMD also felt the pressure in Q3, announcing last week higher desktop microprocessor unit sales but lower ASPs for that segment, leading to a flat quarter for desktop.  However, on the positive side AMD said that it saw ASPs rise for its notebook microprocessors and its server microprocessors.

Still, the desktop price pressure seriously cut into the company’s gross margins, analysts said.

“Despite impressive unit gains, our fears of margin erosion did play out during the quarter with gross margins down 540 basis points quarter-over-quarter as AMD reacted to Intel’s July price cuts,” Caso and Pate said, in a report following AMD’s earnings announcement.

The analysts said that the ASP declines accounted for 300 basis points of the gross margin decline.  While Caso and Pate said that Q4 price pressure will likely ease up a bit, other analysts expect the price war between these companies to continue for the long haul.

“Everybody is hit pretty hard on this,” Enderle said.  “There is no end in sight.”