Just weeks into his tenure as Advanced Micro Devices Inc.'s (AMD ) new worldwide vice-president of consumer channel sales, Stephen DiFranco was wondering whether he should have come to the chip industry's perennial underdog. Sitting in a room with Circuit City Stores Inc.'s (CC ) PC-buying team on a drab fall day in October, 2004, DiFranco grew increasingly disheartened as the retailers ticked off a litany of reasons why rival Intel Corp. (INTC ) had a lock on their business. Intel offered a trusted name, more marketing money, and better support, they reminded him. "I kept saying to myself, 'My God! How do you compete against that?"' DiFranco recalls.
Eight months later, at the June strategy meeting, DiFranco delivered his answer to skeptical CEO Hector de Jesus Ruiz and other AMD leaders. In a presentation he dubbed "War in the Store," DiFranco laid out an ambitious campaign to outmaneuver Intel at retail with more products and better PC configurations rather than trying to go toe-to-toe with expensive marketing campaigns.
It wasn't an easy sell. The execs noted that AMD doesn't make PCs that consumers buy directly and would be forced to rely on partners such as Hewlett-Packard, (HPQ ) Gateway (GTW ) and Toshiba, and hundreds of retailers around the world, to meet its goals. "In truth, some of us didn't like the idea at first," Ruiz says. But a year later, the results are clear. While Intel execs scoff that AMD's surprising surge reflects only its success selling high-end server chips, DiFranco's retail strategy was a major factor in boosting AMD's worldwide share of mainstream microprocessors to 15.3% in the first quarter, from 5.7% a year earlier, according to International Data Corp. (IDC ).
And it may be that stores played an unsung role in snaring AMD's biggest catch to date: Dell Inc. (DELL ) Using more powerful AMD chips in their consumer and business systems, particularly servers, gave HP, Gateway, and Toshiba an edge against Dell, analysts say. That's even more true in high-growth areas overseas where their stores' presence is preferred over the Round Rock (Tex.) company's built-to-order business. The pressure was a big reason for Dell's announcement on May 18 that, after seven straight quarters of AMD gains, Dell would start using AMD chips in its servers later this year. "The competitive dynamic has been more intense than we expected," Dell CEO Kevin B. Rollins told analysts. And there may be yet another shoe to drop: Dell continues talking with AMD about using its chips in mainstream desktops and notebooks.
AN EDGE IN EFFICIENCY
Suddenly, AMD's ambition to create a true duopoly in microprocessors is no longer a pipe dream. It now holds 26% of the lucrative U.S. server-chip business, and a stunning 48% of so-called multicore processors, which put at least two chips on a single sliver of silicon. Three years ago, the high-end server business was Intel's alone. Most significantly, AMD's gross margin passed Intel's for the first time last quarter -- 58.5%, vs. 55.1%.
AMD owes its success in no small part to Intel's missteps. On the corporate sales front, Intel for the past two years has been caught flat-footed by demands from customers for chips that are both powerful and energy-efficient. Its engineers instead worked on the high-end Itanium server chip, which required customers to rewrite software if they were to get the most out of it, while AMD's Opteron did not. What's more, the AMD technology can save big companies big bucks on electricity, and the chips take up less space in data centers because they don't need large cooling fans.
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