Dell = AMD's big Mistake!
So, everybody heard the news. AMD disappointed wall street big time inspite of its painted rosy picture last month. What happened? Is it due to the price war with Intel? Not, entirely! Brace yourselves: it is actually the Dell effect! And yes, you heard that right. You want me to say it again? IT IS THE DELL EFFECT!!!
AMD was so excited they got a piece of Dell, but it discovered afterwards that it was a very sour piece. AMD thought that Dell was the ultimate victory, so, they really did not do their homework before signing the dotted line. What AMD is dicovering now is this: Dell will drain their inventory, alienate their relationship with the channel, and squeeze their margins as much as possible. Evidence: Q4, 2006. AMD will discover that everytime they cut their cost, Dell will be there to collect the new savings!
AMD was locked up with a price war with Intel for few quarters. There is no doubt that this price war is a factor in Q4 results, but the biggest factor was and will always be Dell. What AMD is going to find out is that they may even have to alienate their relationship with other vendors to make Dell happy. Those are relationships they worked very hard to get in the last couple of years.
You see, Dell will play both AMD and Intel for more discounts. That was a major part of their strategy to afford offering their products as such a low price and make money and that is why they were number 1 PC company for a long time. Now, Dell will use the AMD vs Intel competition to shave more profits of the bottom line of both. End result: Dell wins!
AMD did not need to wake up from the sweet dream to find the bitter reality at a time where they need to up their profits to be able to afford paying for ATI and their new fabs. Do not forget their development of new architectures. Sorry, but this big booboo is a big one Hector!
posted by IT Kitty Cat at 10:45 AM
11 Comments:
And what the hell do you know about all of this?
Unless you are on the DELL board of directors or a DELL executive, pretty much everything you said is pure speculation. No proof or facts!
How about this for reality:
DELL lost its negotiating power completely.
Intel has always given DELL 'everything' to be exclusive... AMD is not exclusive so why do people assume AMD would have to sell itself dry?
The truth is that DELL had everything to lose and AMD had a bit to gain! There is no way Ruiz gave them the amazing discount everyone thinks.
An AMD/DELL deal was never concluded earlier not necessarily because DELL didn't want it. Have you ever considered the fact that a deal was not reached earlier because DELL wanted AMD but couldn't get AMD to give the insane discounts?
Obviously DELL got a good price from AMD, but not the kind that you and many seem to think.
9:16 PM
No, IT Kitty Cat hit it bang on.
AMD is suffering bad due to Dell - discounts or not.
Dell is sucking AMD dry. For every dollar that could have been made in the channel they're only getting 80 cents selling to Dell. (Whatever the actual numbers are is irrelevant.)
The demand for AMD products in the channel was high enough that they didn't need to sell to Dell, now AMD is bleeding money. When you have a big outdated inventory like Intel, Dell is a great clearing house, but when you have a tighter product lineup and inventory like AMD, every lost cent is a big deal.
6:57 AM
Dell was with Intel because:
- Volume discounts (meaning lower costs).
- To have an efficient supply chain (again lower costs).
- Better products (at least till 2004).
If Dell went to AMD, it could be because:
- Better products (As of mid 2006).
- Better pricing (for lower costs).
AMD ever had better products than Intel only on Server & Desktops. Intel could have easily negated their lack of product competetiveness on desktops thru better pricing. However pricing cannot achieve that on the Server front. Dell clearly needed AMD there.
If Dell moved to AMD for mobile & desktop CPUs, they indeed gave up some efficiency in supply chain without any obvious benefit. I assume that benefit would have to come thru pricing. Yes, AMD would have conceded considerable ground in pricing to Dell - unless AMD linked supply of Opterons with an uptake of Mobile/Desktop CPUs. I doubt such a deal as it would have given raise to regulatory concerns.
Why AMD wanted Dell deal ?
- Dell has a big business segment and AMD needs more exposure there.
- Dell is a high profile customer any company would want.
- A definite way to gain overall market share as Dell was Intel only.
I think these are stronger reasons for AMD to want Dell than vice versa.
8:17 AM
You see, AMD did have a better 3rd quarter than a 4th quarter in sales and margins. Q4 2006 is still better than Q4 2005 but margins were worse than Q3 2006. What is the delta? Among others, it was Dell most importantly.
Dell to AMD was a psychological win more than a profit win. It was a margins loss though. Dell or any other OEM will not add a supplier who will charge more unless their product is very superior. The addition of AMD came at a time when C2D was just peaking out to the world. So, the timing seemed suspicious to a lot of people. Unless Dell got a huge discount and a solid commitment, they would not have gone with AMD.
But AMD did not really know Dell very well. They never dealt with them before. They put the carriage before the horse on this one. IF they are not very careful, they will see their margins shrinking every quarter. AMD also was counting on their ramping of the 65 nano and thought that by the time Dell would be delivered AMD chips for desktops and notebooks, their 65nano process would be >50% healthy and they would have mature yields and tons of chips to provide Dell and the channel. They did not plan this very well. If they did, their margins would not be "substantially lower" than previous quarters. Note that AMD's warning states that they are still positive on the sales increase, yet margins were substantially lower.
They also did not factor out that Dell was no longer the #1 PC company in sales anymore. HP is the big dog now.. And do not forget about Apple.
I think AMD's move at this time to Dell is a big mistake that will hurt them for a while.
AMD is in a tough position now since they have a commitment for Dell, ramping up the 65nano, ATI integration, and debug and finalize the K8L. I do not be a predictor, but this seems a little too much. I would not be surprised though if AMD pushed K8L a quarter late. to not do this, they have to coordinate this very well. There is no room for mistakes. The Dell deal is not helping AMD at this time, that is for sure!
8:50 AM
AMD is 3% above Q on Q. Where as seasonal increase should hv been around 8-9%. \ s
12:38 PM
shouldn't AMD's sales be 12%, same as semiconductor growth?
7:39 PM
Actually, IT Kitty Cat said it best again - AMD going to Dell was a psychological win.
Intel had Dell sewn up - and AMD got in there too. A coup on a grand scale is what it was - and a statement to the world really, "See how good our products are, Dell sells them now."
7:01 AM
Now that AMD's results are out, is there a need to re-form the opinion ? AMD seems to kept the desktop & mobile margins in spite of supplying to Dell !
But then, with the volume increases they had, should the margins have gone up ? After all volumes impact margins a lot!
7:26 AM
You see, the impact of Dell is shown in the margins. A drop of almost 15% right after AMD started shipping procs to Dell is an evidence of the dilemma. I would agree with "S" if the drop in margins was between 5-10%. But it was not. I think that this will also continue through 2007. AMD may ship more desktops and mobiles, but they will stay in the red.
4:19 PM
but the fact is that Dell and other OEMs made AMD's desktop share grow up to 29.1% from 24.4% in Q4'06...
http://news.com.com/Intel+ups+server+share%2C+but+AMD+wins+in+PCs/2100-1006_3-6154735.html?tag=nefd.top
7:19 PM
No doubt that AMD share has gone up but the margins went down. Although AMD gained market share, it lost revenue share.
That is not in contradiction with what I said. It just says that AMD gained more market share in the low end market (i.e. Dell) where it is not greatly profitable. So, AMD sold more for less.
7:16 PM
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