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Prospects of AMD-ATI Company

AMD Shifts Strategy?

The impact of AMD-ATI merges on the industry, if the merge happens, will obviously be tremendous.

“It will be shocking to the industry. Nvidia and AMD have had a long-term and profitable relationship and that will change. AMD will be able to offer a complete solution (CPU, chipsets, IGPs, and GPUs) which will be broader than Intel’s (only CPU and chipsets currently) However, the duopoly of AMD and Intel and the duopoly of ATI and Nvidia will be greatly disturbed and that may not be tolerated by the FTC,” said analyst Jon Peddie.

“Both companies appear to be doing fine by themselves, and each has an advantage in being independent. If one takes both a very long term view and also believes that graphics and processor functionality will integrate over time, then a merger would make sense. Outside this line of thinking a merger seems less favorable as it undermines AMD’s ecosystem by alienating current partners and also creates an awkward choice for ATI as it would have to choose between supporting Intel potentially to the detriment of a combined AMD-ATI, or choosing to support only AMD and declining the benefits of a larger market and revenue base,” said Dean McCarron, principal analyst of Mercury Research.

If not keep the “platform strategy” “unveiled” by Mr. Sanders seven years ago in mind, the only strategy of AMD, after it either got rid, or simply withdrawn from telecommunications, chipsets, flash and special-purpose processors businesses, was to sell x86 central processing units. When asked about possible acquisition of ATI, AMD’s president Dirk Meyer told analysts: “our mission statement is to pursue standards, that’s core for us and key for us, nothing else.”

“So if that [statement] is true, then how do they rationalize ATI? It’s not a ‘standard’. Maybe AMD thinks it could make it one, but I doubt it,” said Jon Peddie in a conversation with X-bit labs.

AMD Targets Computing Platforms and Other Businesses

But the acquisition of ATI will allow AMD to follow the “plan” of Sanders and the path of Intel. By acquiring ATI, the world’s second largest maker of x86 microprocessors will find itself being a company, strongly oriented on the PC and entertainment industries, as it will be able to:

  • Sell microprocessors;
  • Sell chipsets (with, or without graphics);
  • Sell graphics processors (for desktop, mobile PCs, handhelds);
  • Sell chips for TVs;
  • Sell technologies for consoles;
  • Develop platforms that compete against Intel Centrino, Intel Viiv, Intel vPro and so on;
  • Add graphics chips onto processors, or into additional sockets/slots on mainboards in the long-term;
  • Ensure that its future fabs are fully utilized;
  • Add “new blood” to the company, even though this is not a primary goal: graphics company should not miss 6-months product cycles to stay competitive and AMD will not be able to easily reassign ATI’s engineers to develop, for example, floating point units (FPUs) for the company’s CPUs.

“The lack of a chipset solution puts AMD at the mercy of third-party vendors pricing which hurts the company’s margins. Acquiring ATI would allow AMD to be more competitive against Intel in pricing and post better margins. Currently AMD relies heavily on Nvidia for high-end chipsets for the gaming and corporate PC market. This is a lucrative high-margin business; acquiring ATI would allow AMD to get a bigger piece of the profit pie in this market. Nvidia has a strong brand-name in the high-end gaming market, AMD can however make inroads into this market by offering a strong integrated chipset solution, mirroring Intel’s 'platform' approach,” said Technology Business Research analyst.

Tough to Absorb

ATI has more than 3400 employees in the Americas, Europe and Asia, the majority of whom are engineers. Adding so many employees to AMD’s current list of 9860 means that some kind of head count reduction is going to take place, relocation of certain employees is going to take place and there will be mess with the companies during the merge process.

“ATI is a pretty large company for AMD to absorb. ATI’s Q1 2006 revenue of $652 million is more than half of AMD’s $1.3 billion in revenue during the same period. Any integration problems resulting from the deal could place significant pressure on AMD’s financial results,” added Mr. Kariithi.

While ATI has always addressed the market of OEMs very precisely, the company has strong orientation of building the brand recognition. AMD has always lacked proper publicity and its brand-name is hardly as known among CPU consumers as compared to ATI in the market of GPUs.

ATI May Gain Access to AMD's Fabs?

One of the reason why ATI may be interested in being acquired by AMD is the fact that the latter has its own fabs, which are generally ahead of TSMC or UMC. Potentially, this means that ATI will be able to make its processors at AMD's fabs and ensure that the chips have some advantages over competing offerings.

AMD has process technology similar to that of IBM, where ATI’s arch-rival manufactured the NV40 and NV45 (GeForce 6800 Ultra and GT products) graphics chips, but without much success: the chips could not achieve clock-speeds necessary to dethrone ATI’s R420 and R423 chips (Radeon X800 XT). So, to say at least, manufacturing at IBM did not give Nvidia any tangible advantages over TSMC. It is not evident, that very close collaboration with AMD helps ATI.

A worker at AMD fab 30 in Dresden, Germany

AMD’s process technologies are tailored for AMD’s processors, whereas ATI’s engineers are used to work with TSMC and the tools it requires to create the chips. Even though AMD claims that “dozens of product types and speed grades to be manufactured in a single AMD fab using the same tool sets and production lines”, it remains to be seen whether such manufacturing is really efficient for both AMD and ATI.

If it is possible to create the GPUs more efficiently on your own fab, then, ATI is likely to offer higher performance products and rival Nvidia may find itself in a difficult situation. Moreover, ATI will save pretty much on prototyping costs, if it has access to AMD’s fabs eventually. On the other hand, if AMD does not execute itself well, ATI will not have enough manufacturing capacities for all of its chips.

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