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Price Competition Hurt Intel Sales in 2006

AMD wasn't just a thorn in Intel's side, it took a measurable chunk out of Intel's sales in 2006, according to a report from market researcher iSuppli.

The company found that global semiconductor industry revenue rose by 9.3 percent in 2006 to $260 billion, but Intel  was on the decline. Its global sales dropped 11.1 percent to $31.5 billion. AMD , on the other hand, was up 91.6 percent to $7.5 billion. A part of that was due to the ATI acquisition, but it was also thanks to improved sales.

"This is a case of AMD becoming assertive with their product portfolio," Dale Ford, vice president of market intelligence with iSuppli, told internetnews.com. "They had some nice architecture designs with their processors, particularly in the notebook and server space, where they hadn't had presence before."

Ford said most of Intel's pain came in the first half of the year. When it realized AMD was gaining traction, Intel went into price competition, which caused overall sales dollars to dip. Intel also had its share of problems. "Back in the summer of '06, all the focus was on Intel's workforce reductions and spinoffs so they could focus," said Ford.

"I think it's still too early to say everything's right with the Intel world again. It's a work in progress. The new processor lineup has helped them but they still have many additional steps they have to take and are taking. The good news for them I would say is they've seen the gains AMD has made in the marketplace and are more engaged to defend against AMD in the marketplace."

AMD's victory, though, came with a cost. The company has taken on considerable debt and expense in attempting to take on the much larger Intel, which has considerably better manufacturing and fabrication capacity. Part of AMD's strategy is reflected in the $5.4 billion acquisition of ATI Technologies.

AMD's stock has dropped 60 percent over the past year and the company failed to meet analyst's expectations the last two quarters. AMD also warned it will miss this upcoming quarter. Some Wall Street analysts have recently speculated the company could be taken over by a private equity firm to give it a badly needed cash infusion.

Matt Wilkins, principal analyst for compute platforms research at iSuppli, said it's too early to declare the ATI acquisition a help or hindrance. "I think that to a certain extent it was a necessary thing AMD had to do. AMD was somewhat lacking a platform message. One of the key factors of Intel's success in the corporate market is that it's been able to deliver platforms, comprising the CPU and chipset. Intel has always had a platform message, case in point, Centrino. That's paid tremendous dividends," he told internetnews.com.

Ford said he thinks in 2007, the battle between the two companies will switch to the high end. "My sense is going into 2007, the battle won't be in the pricing realm but the product features and the performance realm. So that could help with the issue of profitability and how they've engaged in that space," he said.

This would jibe with the trend in servers that both Gartner and IDC noted, that fewer physical machines are sold, but they are considerably more powerful.

On the non-processor side, iSuppli noted that Broadcom  had another great year, with sales up 37.3 percent. Three of the top 25 companies in the iSuppli semiconductor list have no fabrication facilities: Broadcom, Qualcomm , and nVidia .

Also doing very well were pure play memory companies like Hynix, which soared 41.5 percent and was number 7 on the list with sales of $7.8 billion. Flash memory, however, is in for a rough time because so many companies have entered the space, including Intel. "All the new entrants has driven the price to collapse," said Ford.