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Analysts: AMD's Just Not That Into IBM Anymore

If IBM could commit just a little more to AMD , they'd find true bliss, so says a report out this week from Merrill Lynch.

But AMD is starting to obligate itself to other projects and may be signaling a need to move on, suggest other analyst firms. The bottom line, say all concerned, is that the two semiconductor companies can still be friends, but IBM needs to focus on its Power processor architecture, and AMD needs to be a far more viable supplier in the server multiprocessing unit (MPU) market.

In an investment opinion entitled "Can IBM help itself with AMD?" Merrill Lynch analysts Joe Osha and Steven Milunovich propose IBM commit a substantial portion of the capacity at its fabrication plant in East Fishkill, N.Y., to AMD's microprocessor business.

"While some complicated strategic questions emerge, AMD's Opteron processor backed by IBM's manufacturing could remake the competitive server landscape," the authors suggested.

Representatives with IBM were not immediately available to comment. An AMD spokesperson declined a request to respond to the Merrill Lynch report.

Merrill's assessment stems from IBM's ground-floor backing of AMD's K8 "Hammer" architecture (Opteron, Athlon64), and might want to jump at the chance to shift its product mix and wean itself off of a dependency on Intel .

Osha and Milunovich contend that embracing AMD might not be the best thing for Big Blue's Power architecture, but that would be a concession it would have to make. The two authors see IBM's Power line continuing to lose market share to x86-based systems in the server MPU market and suggest IBM hedge its bets and align itself closer with AMD.

And after catching Intel by surprise in the 64-bit space, AMD also needs to keep its momentum up with more than just another Intel clone, Osha and Milunovich advocate. The authors say AMD is also in need of a solid production model.

"We watched Cyrix, Centaur and Transmeta struggle with the foundry model, and AMD itself never managed to make microprocessor manufacturing work at UMC," the authors said. "It takes of lot of special tooling to make microprocessors, and although we believe that IBM can get the job done, we don't think that the outcome would be very profitable for IBM if the external benefits of the relationship aren't taken into account."

In stark contrast to Merrill's opinion, a sampling of analysts surveyed by internetnews.com suggest AMD is better off with a diverse number of overseas fabrication partners, because that's where they do the bulk of their desktop and notebook business.

"AMD will go it alone because they no longer need IBM's blessing for their 64-bit efforts that have gained market momentum," Rick Whittington, Managing Director at analyst firm Caris & Company told internetnews.com.

Kevin Krewell, principal analyst for In-Stat/MDR, disagrees with Merrill's recommendations, as well.

"IBM Micro has challenges improving yield on 90-nanometer to keep pace with demand for PowerPCs at Apple. I doubt they would be able to help AMD much, if at all," he said.

"This limitation on AMD's fab capacity will work itself out when AMD opens its 300mm fab -- Fab 36 -- in 2006. A move by IBM to support AMD would disrupt their other businesses to solve a one to one-and-a-half year problem. IBM also has foundry commitments to VIA and NVidia and potential business with [gaming consoles like] Sony's PS3 and Microsoft XBox2."

Krewell also noted that if AMD and IBM started today, it would still take many months to redesign and qualify AMD's K8 in IBM's Fishkill plant just prior to Fab 36 coming on-line.

Gartner analyst Martin Reynolds surmises that IBM could certainly build the part but it would likely be a lot less profitable for AMD.

"IBM is expensive. Also, the other suppliers are unlikely to want to depend on IBM for supply," Reynolds told internetnews.com. "Opteron is doing OK in the market, but there is still a marked resistance to going away from Intel. Part of the problem is that, by the time the technology is wrapped up into a product, the price difference isn't so great. AMD has some performance sweet spots, but they don't make an entire market."

Jonathan Eunice, president, principal analyst and IT advisor at Illuminata, said that even though IBM was an early and enthusiastic supporter, HP and Sun Microsystems have supplanted Big Blue in terms of full line support for AMD.

"IBM has a few HPC-focused boxes -- eServer 325 and 326 -- that use Opteron, but not nearly the scope of systems HP or even Sun offers," Eunice said.

In a recent piece entitled "IBM and AMD: Love Lost," Eunice said IBM has turned its AMD offerings into niche products and now that Intel has joined the party with its x86 64-bit extensions, IBM will look at Nocona before it goes for an Opteron.

Meanwhile, Merrill said an IBM/AMD manufacturing relationship could not only help IBM optimize its fabrication plant in East Fishkill, but also put pressure on Intel where it matters most.

"In the server MPU market, we believe Intel is genuinely vulnerable, both in terms of the pricing that Intel exercises with and the competitiveness of the products it offers," Osha and Milunovich said. "Whether or not IBM actually captures the benefits of lower Intel pricing would be another question - we think that most of the benefits would tend to flow through to IBM's customers."