Recently, little Advanced Micro Devices (NASDAQ:AMD) made a great big gesture of almost biblical proportions: It filed a 48-page antitrust complaint against CPU Goliath Intel (NYSE:INTC). This new Silicon Valley drama could be yet another spinoff from a successful prime-time series. Let's call this one Law & Disorder: Central Processing Unit.
The lawsuit claims that Intel, which reported earnings yesterday, engages in anticompetitive practices against PC manufacturers, IT distributors, and electronics retailers that buy "too many" AMD chips or products containing AMD chips. The complaint claims that Intel's alleged practices -- financial inducements to use Intel products, combined with numerous forms of economic punishment and other disincentives for doing otherwise -- have harmed competition and restricted innovation.
These charges are not new in the computer industry, where Intel is sometimes known as the "Velvet Hammer." What is new is AMD's stepping up to hurl the stone at Intel.
AMD, long considered the Avis to Intel's Hertz, has been giving Intel a run for its money over the last couple of years with its slick 64-bit Athlon (for PCs) and Opteron (for servers) processors. AMD recently released a new dual-core chip, hot on the heels of Intel's new dual-core parts; and its Turion wireless chip is going head-to-head against Intel's Centrino in wireless notebooks.
Why hurl the stone now?
A number of things have paved the way for AMD's lawsuit.
Japanese trade regulators recently investigated Intel's business practices, predicated in part on complaints from various Japanese original equipment manufacturers (OEMs). In that case, it found some of Intel's behavior to be anticompetitive. No doubt the published findings will be useful to AMD's suit.
Additionally, AMD recently built a new fabrication plant that it could run at close to capacity if it can get enough demand. If Intel's alleged anticompetitive behavior can be changed, the economics of this new plant (cost per unit of output) look better, and so would AMD's margins.
In my opinion, AMD's parts are higher-performance and higher-quality than Intel's, but Intel has held back AMD's market share gains. Thanks in no small part to the 2003 introduction of its Athlon and Opteron processors, though, and the resulting market share gains, AMD's stock has moved up over the past two years. It's gained about 150% in that time versus the S&P 500.
If successful, this lawsuit could greatly improve AMD's business, which has never had the best financials. Financially speaking, the biggest problem at AMD in the past has always been depreciation running ahead of operating income, and that's bad for a manufacturing company. AMD might be able to claim breakeven status, or a little better, but the bottom line has traditionally been clobbered by all the fabrication-plant depreciation. (Remember: Net income and earnings before interest and taxes are computed after the depreciation expenses have been included.)
Can AMD seriously challenge Intel?
As I mentioned, both AMD's stock price and market share have gained ground, driven largely by its Opteron and Athlon products. But although AMD has made strides to catch up to Intel, it can't seriously threaten Intel so long as Intel maintains its alleged "monopoly" practices.
The big tactical questions with AMD, as they have been for 20 years, are: Can the company execute? Can it deliver consistently? Can it ramp up volume production? AMD will need to prove that it can execute -- especially if the lawsuit is successful and leads to substantially more share gain (and I think it will). If AMD can't execute for a larger share than it has now, then it may not be able to hold onto any business it gains as a result of fighting Intel.
To really knock the cover off the ball, AMD needs computer heavyweight (and Motley Fool Stock Advisor pick) Dell (NASDAQ:DELL) as a customer. The way things currently stand with Intel, it's unlikely that Dell would use AMD's parts. Dell's tactics are to partner with, or source from, market-share leaders -- the Hertzes, not the Avises. But if AMD is able to gain significant traction with other OEMs, Dell might follow suit. Perhaps that's the goal of its lawsuit.
(In an interesting twist, Dell's former chairman, Mort Topfer, is on the AMD board. So I assume he has some useful insights into Intel's business tactics. I wonder how Intel feels about that?)
I think that in the longer term, AMD will be the better company to own. A combination of PC demand, the fact that AMD is more willing to service the low-end of the CPU business than Intel is, and improved margins following the spinoff of AMD's low-margin flash business should all help it become more appealing than Intel from an investment standpoint. I don't expect the lawsuit to be at all meaningful for AMD or its investors anytime soon, however. Since the wheels of justice grind slowly, I doubt that we'd see a decision until well into 2006 at least, and possibly 2007. But at the margin, it's a long-term positive for the company.
Street expectations are "cautiously optimistic" (I hate that phrase) for AMD's legal chances, but I think AMD's lawsuit could exceed expectations. After all, just about every OEM would love a second source to the big playground bully Intel. And for AMD and its investors, that would be a most welcome development.
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Fool contributor Melanie Hollands does not own shares of any company mentioned in this article. The Motley Fool has a disclosure policy.
