AMD’s Hammer: The Right Tool for the Job?

Hector de Jesus Ruiz refuses to admit he’s licked. Sure, the CEO of
Advanced Micro Devices Inc. has seen his company come up short in a bitter arms
race with rival Intel Corp. After a string of chip-production delays, AMD’s
share of the PC market has fallen to 15% at the end of 2002 from 22% a year
earlier. And AMD’s debt rating has sunk further into junk status. But Ruiz is
planning a massive counterstrike. "Stay focused," he told a gathering
of 200 top employees on Feb. 5 in San Francisco. "The toughest thing for us
is to do what we said we were going to do."

Intel’s Barrett: Forced to pick up the pace in the 64-bit race

Ruiz is pinning his hopes on a new family of chips called Hammer. First up,
in April, will be the company’s new server chip, known as Opteron. Following a
year of delays and technical glitches, the new chip represents the Sunnyvale
company’s last, best chance to put a dent in Intel’s armor. AMD may be
losing the race with Intel in the PC world, but Hammer could be the sliver of
silicon that gives it an edge for the next generation of computing:
high-performance machines that process data 64 bits at a time–twice the
current rate.

Intel has its own 64-bit entry, called Itanium, which CEO Craig R. Barrett
says will continue to improve. "Every two months, you’re going to see
another leap forward," he says. Unlike Hammer, however, the Intel chip
forces customers to rewrite all of their 32-bit programs for the new system.
That’s a costly and laborious process. By contrast, Hammer is like getting two
for one, says Ruiz, with no trade-offs in performance. Customers can rewrite
software for the 64-bit chip anytime they want.

AMD’s Ruiz: Customers are intrigued–but hanging back

Why? Their crop of 32-bit programs not only work but in many cases perform
better because AMD improves the way the processor and memory communicate with
each other. Powered by the Hammer family, Ruiz is hoping that AMD can double its
5% share in the server market this year. Higher price tags for the Hammer, say
analysts, would drive up AMD’s server revenue from $10 million to $100
million. And that number could double if Ruiz meets his goal of 20% share by
2005.

Has AMD bet correctly? It offers customers a cheap path to 64 bits. That’s
a powerful pitch during the longest tech spending downturn in history. What’s
more, early testers rave about the processor. Privately held computer seller
Angstrom Microsystems will use Hammer to build high-performance servers for
financial institutions, movie studios, and oil companies.

AMD VS INTEL With its new Opteron chip, AMD is squaring off against Intel

The Boston company says customers were concerned that they would have to
rewrite software for Itanium. "People want an evolutionary process, not a
revolutionary process," says CEO Lalit Jain.

Wall Street long viewed AMD as little more than an Intel clone and wrote it
off for dead after a court ordered the company to stop reverse-engineering Intel
chips by 1995. To the great surprise of many, AMD overcame a string of
manufacturing debacles and developed its own chip. AMD wowed the world again in
1999 with the Athlon chip for PCs, which briefly won the speed crown from Intel.
Still, Intel has come to grips with each challenge, eventually pounding down AMD
with manufacturing might and power to slash prices.

Again, AMD has stumbled with Opteron. Troubles with technology called
silicon-on-insulator, which helps the chip consume less electricity, led to
delays. In November, AMD had to pay IBM, which pioneered the technique, almost
$46 million to help clear up the silicon problem.

Despite these maddening detours, the prospect of a 64-bit chip compatible
with existing programs has plenty of software companies on board. In late
January, IBM’s software division revealed that it has prepared its 64-bit
Linux database software for Opteron chips. An even bigger endorsement comes from
Microsoft Corp, which will begin shipping a 64-bit Windows server operating
system for Opteron ahead of the chip’s launch. And in a break from the company’s
traditional hand-in-hand relationship with Intel, Microsoft execs are talking up
Opteron. They say the AMD chip helps companies that want to move at their own
speed. "With 64 bits, some customers are going to want to ease into
it," says Bob O’Brien, group product manager for Windows Server 2003.

Still, with the April release just two months away, AMD is waiting for
customers to sign on. Equipment makers such as Dell Computer Corp and Fujitsu
Ltd have yet to commit to building systems based on the chip. Dell President
Kevin B. Rollins says customers are asking about Opteron. But the company will
wait to see if there’s a groundswell of demand. The same goes for IBM’s
hardware group. "They’ve become the `show me’ company for all
concerned," says Banc of America Securities LLC analyst Douglas Lee.

The problem is, AMD’s delays have allowed Intel to reformulate its
strategy. Although Intel execs deny it, the industry is abuzz with talk that if
Opteron begins grabbing share, the behemoth may add 64-bit capability to its
bestselling 32-bit Xeon server chips, which now account for some 50% of the
server market. Publicly, Intel execs insist they’ll stick with Itanium. On
Feb. 19, Intel said it would speed up planned improvements to its Xeon chips,
including boosting speed and memory. "We have a lot of flexibility to
accelerate," says Lisa Graff, Intel’s director for enterprise processor
marketing.

AMD doesn’t have the same luxury. For most of last year, Ruiz has been
focused on damming the river of red ink. For 2002, the company reported a net
loss of $1.3 billion on revenue of $2.7 billion. Over the past year, AMD’s
stock has tumbled 81%, to about 5. On Feb. 17, the company laid off 350 people,
the second round in a plan to cut as many as 2,000 workers by June. And in
January, AMD jettisoned a plant-construction deal with Asian contract
manufacturer United Microelectronics Corp. AMD says the pruning will help it get
out of the red by June. Ruiz’ goal is to break even on expenses of about $800
million a quarter.

To hedge his bets in case Hammer is slow in grabbing buyers, Ruiz also is
counting on hot new products in other markets. The chipmaker has been gaining
traction as a supplier of flash memory, increasingly used in electronics such as
cell phones and handhelds. Intel is the leader in flash, but in just a few
years, AMD has grabbed 13% of the $8 billion market. In the next year, Ruiz
hopes to double that figure.

The chief insists that AMD’s rich product lineup will restore the company’s
balance. "We just need a little help" from customers, he says. With
Intel dogging AMD every step of the way, the Hammer can’t come down soon
enough.

By Cliff Edwards in San Francisco