The X Factor: X64 Chip Price War Looms

Published: March 16, 2006

by Timothy Prickett Morgan

After getting their respective Xeon and Opteron roadmaps in order for 2006 and 2007, Intel and AMD are heading for a price war. Will they be smart enough--or stupid enough--to do it, and what does a price war mean for the server market?

In the fourth quarter of 2005, Advanced Micro Devices, the upstart clone 32-bit X86 chip maker that has defined, more than Intel, the architecture of the 64-bit X64 generation--at least so far--was able to get a 25 percent revenue market share in the X86/X64 server market in the United States. This huge jump in market share is, to many, a leading indicator of how well AMD will do in the worldwide market for X64 chips in 2006 and beyond. And now that Intel and AMD have put their roadmaps in order and the transistors and watts have fallen where they may, that leaves one key differentiator between the two companies' respective Xeon and Opteron server chips: Price.

The question now is, who will pull the trigger first?

Intel may have started it inadvertently earlier this year, when it chopped prices on its dual-core "Paxville" Xeon DP processors by 15 percent to counter AMD and to make these chips, which are really just two single-core chips crammed into a single package rather than a real-dual core chip that has two cores with shared cache memory on a single die, more cost competitive. Intel says it launched the Paxville chips several months early last fall, and also felt it could charge a premium for them. Something AMD clearly proved it cannot, particularly with Opteron 200s having more computing oomph for less watts.

With Intel's dual-core "Dempsey" Xeon DPs right around the corner, and its "Woodcrest" kickers coming after that and offering a big improvement in performance per watt, it seems likely that Intel will price the Dempsey chips very aggressively so it can get customers to buy between now and the beginning of the third quarter of 2006. That means that Dempsey will be priced very aggressively, not only compared to Paxville, but also compared to AMD's Opterons.

For the past 18 months, AMD has been able to take a 10 to 15 percent performance advantage on chips with lower clock speeds and lower electricity consumption and heat dissipation and turn that into market share. But with the move to 65 nanometer chip making processes, which Intel has running in four of its chip factories, Intel is gearing up to bury the market in chips. At Intel Developer Forum a few weeks ago, the company was trumpeting that it was closing the performance and watt gaps with AMD by switching to the new Core architecture, which is derived from its laptop chips, and Pat Gelsinger, who runs Intel's Digital Enterprise Group, said that the move from 90 nanometer processes to 65 nanometer processes allows Intel to move from one to two cores for essentially the same money. AMD, which beat Intel to market a year ago with dual-core chips based on 90 nanometer processes, thinks it can still beat Intel using this technology and is not planning on switching to 65 nanometer processes until 2007.

If AMD continues to have a performance and thermal advantage compared to Intel's new Core-based Xeons--and this seems likely--then Intel has only two interrelated weapons to fight with: higher production volumes and the lower prices it engenders. This is what many analysts in the IT area and on Wall Street expect to happen. The first real shot comes when the Dempsey Xeons come out this quarter, and it seems likely that Intel will shoot low to regain some market share and count on related platform sales--chipsets, motherboards, and so on--to make up the revenue gap. AMD has moved out of the chipset arena with its next generation of Opteron chips, the so-called "Santa Rosa" or "Rev F" Opterons, and looks to partners to create chipsets and platforms. So it will not have that extra money to fall back on. So a price war will have could have a double-whammy effect on AMD when the Rev F chips start coming to market. Intel can cut $50 off the price of a chip, and put $25 back on the chipset, for example, while AMD has to cut $50 off the chip and leave it at that. And if AMD tries to charge a premium for its greater thermal efficiency or performance, it may find that customers do not need performance as much as they want efficiency.

The real winners in this looming price war will be customers, of course, as well as suppliers of Linux and Windows operating systems. A lower cost for a server puts less pressure on them to cut their own prices because customers tend to buy bundled machines these days. And the real losers will be RISC/Unix and proprietary systems makers, who will have to cut that much more out of their prices as X64 chips move to cheaper dual-cores with even lower prices than the single-core chips they replace from 18 months ago.

The funny thing is, neither AMD nor Intel will win from this price war. But that is the way with wars most of the time, isn't it?