Analyst Opinion - Intel had a surprisingly strong quarter. AMD went the other direction and is now taking a number of actions that probably should have come right after the ATI merger. The difficulty the company is facing is one of competing with a vastly larger and better funded competitor in a market largely defined by standards that its rival sets. In short, it has always been Intel’s game, its home field. And even in the beginning, AMD only got what Intel gave them.
Intel lost its way a few years ago and AMD moved aggressively against them. But the litigation between the two firms reveals that Intel had the power to block AMD even when AMD had better products and while that will likely result in fines and penalties to Intel, it won’t change Intel’s natural dominance.
So, is AMD screwed? Should they pack up and go home? Well, in a way, Microsoft had a similar problem with IBM in the enterprise in the early 90s and Microsoft, who was at an even greater disadvantage, prevailed. So, how do you beat a dominant competitor?
Rule 1: Change the battlefield
The entrenched vendor has a problem the challenging vendor doesn’t have: It is tied to the status quo and isn’t willing to make major changes that would destroy the current revenue model. But the world changes and if you can ride or drive a change more aggressively than the dominant vendor, you can emerge dominant yourself. That’s how Google beat Microsoft.
In a way that’s what Apple did with the iPod and may still do with the iPhone. Apple created something vastly different, based on a back end service that the other hardware manufacturers could not emulate. Microsoft moved around IBM not by targeting IT, but by focusing on empowering users who drove Windows into enterprises, which eventually crippled the dominating power of IT.
What if you looked to Google as the disruptive force that is showcasing how companies could build their own hardware and successfully deploy it? What if AMD worked with Microsoft to get special multi-user licensing for Windows so that PCs could be shared and resources dynamically sent to those who needed it? If one AMD multi-core processor could be used by a family, wouldn’t it carry a higher margin and wouldn’t the solution be less than Intel’s? What if AMD designed systems that were vastly easier to upgrade as components, allowing people to upgrade without buying new systems or ever being intimidated by a bare motherboard?
Change the battlefield from price to value and given that software doesn’t work well with more than three cores anyway, shift to a shared resources model.
Rule 2: Focus
Large and complex companies tend to do lots of things at once and can get very distracted as a result. This is what happened to Intel after Andy Grove stepped down. Suddenly, Intel was in consumer electronics, hosting, IT outsourcing for others and, generally, Intel did not keep its eye on the core business. This will always be a problem for a large company. There are simply too many things going on for the executive management to stay focused on all of it.
Pick the areas where Intel is most exposed - graphics, OEMs, Microsoft and end users - and resource them. This is actually a set of things that AMD has been known to do well, but they tend to under resource the efforts, which has reduced the returns substantially.
Google is more focused than Microsoft, Microsoft was more focused then IBM, and Apple is more focused than any other tech company. When you are smaller, you need to focus at what you’ve got and drive it home. But, it can be fatal to try to put resources on everything your vastly larger competitor is doing because that competitor, in terms of absolute investment can always outspend you. The trick is to husband your resources so you can outspend your rivals on critical point projects, while they try to cover everything.
There is an interesting file floating around the web which uses PowerPoint and animations to show the history of the Second World War. You can actually see the point where Germany, which was unbeatable, overextended itself and then got beaten badly. AMD needs to let Intel overextend and pick and fund key strategic efforts in markets where the playing field is more even. Consumer, MIDs/UMPCs, cell phones, and home automation largely don’t care about Intel inside and are looking for something they currently aren’t getting (which is why you see lines for the iPhone but not for any new PC).
Rule 3: Quality over quantity
Think of the Spartans at Thermopylae (the movie 300 was over the top, but makes the point): They were the best trained (highest quality) solders of their time and while they eventually got their butts kicked, they took on a vastly larger force and held them for a prolonged period. They didn’t do it by going man to man; they did it by focusing on quality over quantity. You might think of this as another way of saying focus, but it is more than that. It is setting a quality mark higher than your competitor is willing to set - and making the market understand that quality.
Think about it: Does Apple compete on price or do they compete on perceived quality? Often, we define products by performance, but there are other measures that are often more important. We don’t, for instance, all drive cars with big V8s. Toyota beat GM and Ford not by having more cars, more lines, or more resources. They beat them by having better gas mileage and better quality at similar prices.
There is a large number, I would argue the majority, of buyers who would like a PC that would last for 7 or 8 years that would never crash and that would use less power. AMD will probably never sell more processors than Intel does, but they could build a platform that could be seen by some as better. Then the goal can be to expand the "some". That’s what Apple is doing in the face of incredible odds. I mean, look at the combined resources of Microsoft and every OEM on the planet, yet Apple, instead of going under, is growing at an incredible speed.
Rule 4: Fund great marketing
Apple outspends HP, the largest and most powerful PC manufacturer by an estimated four-to-one in PCs. This is because HP has to fund marketing across a broad portfolio of products. Marketing is what got folks into lines for the iPhone and it is what gets customers to prefer one ingredient brand over another.
Marketing is also not a factor of just money, but of skills and capabilities. Intel and AMD are engineering driven companies. But, as Motorola recently found out, an engineering driven company can be wiped out by a marketing driven company, if marketing is designed into the challenging (Apple iPhone vs. Razor) product.
You can do everything else, but if you can’t promote your product, you might as well have retired early.
Wrapping up: AMD has the potential for great things
AMD can’t continue to run at Intel head on. Intel is bigger, better funded, more deeply entrenched and isn’t making the mistakes it once made. To win, AMD needs to not just embrace the concept of the little guy taking on the larger force. They need to become the Spartans capable of providing a higher quality offense that is up to challenging Intel’s dominance.
It is that alone that will decide if AMD kicks Intel butt or has their butts kicked by Intel.
Rob Enderle is one of the last Inquiry Analysts. Inquiry Analysts are paid to stay up to date on current events and identify trends and either explain the trends or make suggestions, tactical and strategic, on how to best take advantage of them. Currently he provides his services to most of the major technology and media companies.