In early 2006 when Intel announced their new architecture there was wide expectation that prices would stay constant at launch – Intel was expected to drop pricing only on the Pentium 4 architecture to clear out excess “sell-proof” inventory. In the meantime AMD already won a number of design wins throughout the industry, and they also had plans to finally tip the scales within Dell who, at the time, was 100% Intel. Other than potentially losing the performance crown in the high end sliver, things were looking quite good for them.
So, imagine if you will the scenario where AMD and Intel both have equally compelling “good enough” products for the mainstream, and Intel is winning the performance game – this, in a nutshell, is where we sit today.
You would never see me discount the value of the high end. It is very important to both Intel and AMD to maintain the performance lead because it tends to have a profound halo effect. That said, it took AMD many months of holding the performance crown in order to crack the mainstream - and with the help of a great management team (and equally great products) they finally wedged their way in. This is not something that will be easily lost, even if AMD lost the performance crown - which ultimately, they did.
One must understand that the high-end is a very tiny part of the market, and mainstream is where most of the volume is. Both AMD and Intel are recognized mainstream CPUs, so there’s no reason to doubt that this trend will continue for some time to come. Although winning in the high end is sweet, because in that particular space any company can charge premiums for their product, and it's probably the one place in the market that price discounting is the only way for the challenger to win business.
Knowing the above, AMD should have kept pricing constant on their mainstream products because they were already sold – and there’s no point in starting a price war when you don’t need to right? Intel didn’t have room to start a price war – instead they should really milk it for all its worth. Ferrari would never discount their cars, so why discount your part when you know it’s good? Furthermore, in the CPU business "good enough" is more than enough for the mainstream - and if you can value in other areas, such as software bundles, then why drop your pants at the same time?
Both Intel and AMD need to take a page from Nvidia’s book and post it in their cubes (perhaps a picture of Jen-Hsun Huang holding a baseball bat might help). They might also want to read some of my old blogs about price wars. The bottom line is if you have the best component, people will buy it as long as the price is reasonable. There’s no need to drop the price below “reasonable” levels unless there is a valid business reason to do so.
So why the heck are Intel and AMD eating margin when they don’t need to?
Many of you are probably wondering why I’m even writing this. Well, first it’s not really a secret. Anyone with a brain can figure out that price wars for the sake of saving market share are highly unproductive. It’s not like either company wins because the other one will quickly follow.
That said, you’re better off to innovate to win market share rather than sell junk in a box. When you strip costs to the bone you have nowhere left to go but down – and this is an extremely unhealthy position to be in.
Technologies like AMD Fusion hold huge promise for the industry – and if managed effectively AMD will pull it off (and pay down that massive debt). At the same time Intel is making some awesome moves to clean house – so it might be a good plan to keep margins strong rather than devaluing the entire tech industry.
I’m just a simple guy, but this isn’t rocket science man. There’s no strategy in “eye for an eye” chess games. I would rather see AMD and Intel make a fair margin so they can continue to put more resources back into R&D to design more innovative products. This goes out to your product marketing people - wake up guys, don't make reactionary decisions.