Intel-AMD competition moving away from prices, and towards technology

The fight between chip makers Intel and Advanced Micro Devices (AMD) is starting to heat up. After AMD began pushing new, four-core processors in September, Intel has promised to hit back with a fresh microprocessor design next year.

In September, AMD released a new four-core processor design, nicknamed Barcelona, which is getting strong reviews and commands premium prices. The company is now bringing out variations on this design in ever-larger numbers.

Intel is relying on its manufacturing prowess to shrink the size of the transistors on its processors to 45 nanometers by November. This, says Intel, will allow the company to stamp out processors that do more work and consume less power. AMD will be able to match Intel''s specs only by the middle of next year.

That could give Intel the breathing space it needs to deliver its big punch next year, through Nehalem. The design has many of the features AMD introduced this year on Barcelona. Then, Intel plans to further shrinking the transistors on its new processors down to 32 nanometers by 2009…

The new cutting-edge chips from both companies may temporarily end the price war. In fact analysts see a less aggressive pricing environment going forward. Some go as far as to predict that average selling prices for microprocessors will begin to rise next year.

It all started when AMD grabbed a huge chunk of Intel''s market share in the lucrative server processor business. Then, the two companies got into a bruising price war that ground down profit margins. That led to painful cost cuts, last year at Intel, and this year at AMD. Now, the fight is entering a new phase.

But first, Intel chief executive Paul Otellini has to crank out higher profit margins, to placate uneasy investors. Markets expect earnings of 30 cents a share, to be announced on the afternoon of Tuesday 16 October. Investors have set their hearts on around $1.8 billion in net income on sales of approximately $9.6 billion. The key is margins; investors are looking for gross margins of 53.4 per cent or better, up from a "disappointing" 46.9 per cent during the previous quarter.

In the past, Intel has scored gross margins as high as 62 per cent. But that ended courtesy of competition from AMD. An improvement in Intel''s gross margin will be a signal that Intel continues to occupy the high ground in its fight with its smaller rival. This year, Intel''s shares have risen more than 27 per cent, while AMD''s have fallen more than 30 per cent.

So who is going to win? Intel has the edge, thanks to its market muscle. If Intel can command good prices for its chips, AMD will have to hurry development of new chips and discount them, just to keep up. That would then lower prices for the next generation of cutting-edge processors from Intel and disappoint its shareholders, but it would be good for consumers like us.