AMD Bets on Changing Graphics Industry

Did AMD make a mistake by moving on its $5.4 billion acquisition of graphics chip
company ATI, or will the plan help the Intel rival gain a
greater share of the market?

Although the deal will not affect the microprocessor industry in
general, it will help Intel and boost prospects for ATI’s competitor, Nvidia, in the short term, said Gartner’s Martin Reynolds.

Intel was one of the two customers for ATI’s graphics chipsets. With
ATI under AMD’s fold, Intel will likely show preference to ATI rival,
NVidia, according to the analyst.

Although AMD said in a statement the integration of ATI will save the
combined company $125 million by 2008, Reynolds said concern over the
lost Intel revenue will likely cause AMD to take its eyes off the
ball, providing Intel with an opportunity to snatch more market share.

“The short-term risks are very high” for AMD, according to Reynolds.
However, if AMD can survive the short-term hazards, there could be
long-term benefits.

One advantage of teaming up with ATI and integrating graphics with
AMD’s CPU is the possibility of selling a more inexpensive laptop, an
attractive market for both Intel and AMD, the analyst said.

While some question the wisdom of the agreement, which includes $4.2
billion in cash, 57 million AMD shares and a $2.5 billion loan, the
proposal is “a pretty sound bet” for AMD, said Charles King,
principal analyst with Pund-IT.

As previously reported, AMD’s goal is to
expand into platforms “that integrate microprocessors and graphics
processors to address the growing need for general-purpose, media-centric, data-centric, and graphics-centric performance.”

King said the acquisition, expected to be finalized by the end of
2006, holds promise for both AMD and ATI.

For AMD, the purchase could help shore up its ailing CPU sales.

week, AMD missed its projected sales for the second quarter of this
year, brought down by a lagging revenue from desktop computer chips.

ATI, on the other hand, offers “an additional revenue stream that is
fairly reliable,” according to King.

The ATI acquisition could help AMD retake some of the desktop or
consumer markets, according to Dave Orton, ATI CEO. The arrangement
means AMD could expand into chips powering cell phones or high-definition televisions.

What prompted ATI to agree to the buy-out?

“The market wisdom is ATI
has lost a step to NVidia,” the analyst said.

The acquisition is also a sign of the waning days of individual
graphics chips.

“It’s a sign of further commoditization,” Joe Wilcox,
analyst with JupiterResearch, said.

The average consumer is more
interested in how much memory a graphics chipset will require rather
than whether the graphics are based on ATI, NVidia or some other
graphics processor.

Jim McGregor, an analyst with In-Stat, believes the market for independent graphics solutions is a thing of the past.

He believes the quality of graphics chipsets from Intel and others has increased to the point where NVidia will need to seriously consider accepting a
buy-out offer as ATI did today.

Attempting to explain the planned acquisition, AMD CEO Hector Ruiz
said during a conference call the contact between graphics and CPU
will become chummier.

“We will move from being neighbors to being family,” Ruiz said.

The new company, expected to have $7.3 billion in sales, will be
based in Sunnyvale, Calif., according to a statement.

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