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.”

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