Intel Takes the High Ground

As any general worth his salt will tell you, controlling the high ground on a battlefield can make all the difference. Judging by the latest market-share data, it can also be valuable in the PC microprocessor market.

Last week, iSuppli reported that on a revenue basis, Intel's (NASDAQ:INTC) share of the market for PC and server microprocessors had risen by 1.5% from the first quarter to the second quarter of 2009, reaching 80.6%. That's the company's highest such number since 2005. AMD (NYSE:AMD), meanwhile, saw its share drop by 1.3%, to 11.5%, with iSuppli noting that this decline had more to do with a drop in prices than unit shipments.

What happened here is the natural result of Intel's virtual monopoly on the high end of both the desktop and notebook microprocessor markets; the former with its Core i7 line, and the latter with its Core 2 Duo products. Critics will argue that high-end chips account for only a small percentage of microprocessor sales, and that most users don't need the kind of performance they deliver. True enough. But if only one company is able to offer top-of-the-line chips, you can rest assured that it can charge a king's ransom for these products.

Meanwhile, in a bid to gain market share, the company can aggressively price those chips that are "merely" as good as the most powerful products of its competitor. And in the cheaper segments of the PC market, it can keep selling older chips for which manufacturing costs have fallen considerably.

It's a nice trickle-down effect, and it results in healthy margins and a strong overall position for the company that has been dominating the high-end niche. At the same time, its competitor has to make a gut-wrenching choice: Keep prices steady and bleed market share, or slash prices and watch its margins take a hit.

AMD preferred the second option -- hence the second-quarter declines in both its chip prices and gross margins. Now Intel has released its first Core i5 desktop chip, which can outperform AMD's top-of-the-line Phenom II chips at a competitive price. So AMD has decided to up the ante by releasing a family of inexpensive Athlon II quad-core chips. While not as powerful as the Phenom II chips, the Athlon II chips are priced to sell -- the cheapest one goes for just $99 -- and they should limit AMD's desktop share losses on a unit basis. But on a revenue basis, the share declines will likely keep coming.

Meanwhile, Intel can compete with the new Athlon II products with its older Core 2 Quad desktop chips, which, at this stage in their life cycle, should bring decent margins even at lower price points.

On the notebook side, Intel just came out with its first Core i7 parts. They should have the high-end segment all to themselves; expect to see them in some Apple (NASDAQ:AAPL) MacBook Pros soon. AMD just released its Turion II processors, which should be a little more competitive with the Core 2 Duo than the Turion X2 products that preceded them. But with the Core i7 chips available, Intel can now slash prices on some of its Core 2 Duo chips. And so the beat goes on.

AMD's competitive standing does look pretty good in the graphics processor market, where its new Radeon 5870 chips have the high-end market all to themselves. Here, the shoe is on the other foot for AMD. NVIDIA (NASDAQ:NVDA) could have a tough time competing against it in the desktop graphics card space over the next few months. And Hewlett-Packard (NYSE:HPQ), which is AMD's largest customer by most estimates, appears committed to keeping AMD-based products a major part of its PC lineup, the better to keep Intel honest.

But on the whole, Intel has to feel pretty good about how its control of the high end has let it set the tone for the PC microprocessor market as a whole. Throw in a stabilizing PC market and Intel's control of the booming netbook segment with its cheap, low-power Atom chips, and suddenly the revenue and gross margin guidance increases given during Intel's Q3 update look like a sign of things to come.