On the ATI/AMD deal

OK, I know I’ve just said I don’t care enough about the deal to comment on AMD buying ATI (which, through the magic of future posting, was actually written 24 hours ago), and then I go and find two really good write-ups on the deal. First, hit DubiousQuality and check out Bill’s view. He makes some good comments on the deal – certainly enough for me to start caring about the deal. When we’re done there, we’ll look at Joystiq’s addition to the discussion, BTW.

First, from DubiousQuality:

Yesterday, AMD announced that they were buying ATI for over 5.4 billion dollars.

Here’s some context for that announcement. AMD’s revenue for the trailing twelve months was 5.95 billion dollars. Intel’s projected research and development budget for 2006 is $6 billion dollars.

Okay, that’s a bit of a fudge, because $500 million of that $6 billion is “share based compensation,” but even without that, Intel is spending in research and development just slightly less than AMD’s total revenue. So that helps give you an idea of the kind of resources Intel has compared to AMD, which happens when you’re 6X the size of your primary competitor.

OK, we’re set up with context. This matters for where he goes with the commentary.

AMD has been dominating the U.S. retail market. They have over 81% of that market, believe it or not (CNET story here). And in other markets, they’re gaining–up to 37% of notebooks and 14% of servers.

Here’s the problem: the U.S. retail market only constitutes 9% of the global computer market.

Here’s the other problem: integrated chipsets (with on-board graphics) are a gigantic market. Do you know who’s the market leader in “PC graphic devices”?

It’s Intel, believe it or not, and that’s entirely due to integrated chipsets.

So AMD is dominating a fraction of the market, but they’re not even playing in the gigantic market of integrated graphics.

And with that, I see the wisdom of the deal. Intel is huge. AMD, while doing an outstanding job competing in the technology sector, is facing a much bigger creature. And surprisingly, part of the size for Intel comes from the integrated graphics chip market. AMD is basically looking to graphics chips as an extra avenue for growth. Intel has come out with some killer CPUs, and they are really putting pressure on AMD’s processor dominance.

Basically, AMD is diversifying – you know, that thing investment counselors always tell you to do to protect yourself when one market goes bad. AMD is going to take ATIs killer graphics capabilities and work on reducing them to a super-affordable chipset for mounting on motherboards. They want some of that action, and they took the quickest, and probably safest route to the integrated graphics market – buy a big player with strong engineering.

Next, the Joystiq view of the deal:

It seems that graphics powerhouse Nvidia is reacting rather well to news of AMD scooping ATI off the corporate shelf and filling in coupons to the value of $5.4 billion at the checkout counter. Speaking to BusinessWeek Online, Nvidia CEO Jen-Hsun Huang described the purchase as a “gift”, presumably whilst reclining in a henhouse, sipping cocktails and counting objects of some kind. He went on to say that ATI was “throwing in the towel, leaving us as the only stand-alone (graphics chip) company in the world.” Of course, not being a stand-alone graphics chip company hasn’t stopped Intel from competing in that market, so perhaps winning the “who can be the last stand-alone company” competition isn’t all that important.

. . .

Mr. Huang’s expectations may turn out to be accurate in the long run, but in an industry that was once ruled by 3dfx Interactive (remember Glide?), anything can happen.

So Joystiq points out the reality that being a stand-alone graphics chip company may not be the best strategy in the long term. While Nvidia has done an exceptional job as a standalone graphics chip company, as the big players look to get bigger, the not so big players might just get, um, crushed. And as the folks at Joystiq hint, it really only takes one or two missed/bad cycles to go away – 3dfx is the ultimate example of how quickly the graphics market will leave a company behind.

Nvidia almost didn’t even make it past the days of supplying graphics chips to Sega for the Saturn, so management there should not be too quick dismiss the security of having a partner with big pockets.

[tags]ATI, AMD, Commentary on AMD buying ATI[/tags]