Comment : AMD's Spinning Off Its Foundries.. What If It Fails?

AMD confirmed that it will spin off its chip building operations completely in order to concentrate on chip design. This, as we pointed out earlier today, marks the end of an era where only having a chip factory (or so call a fab) is the hallmark of success.

Intriguingly, W.J. Sanders III, the then-chairman of AMD (Advanced Micro Devices Inc), said once that "real men have fabs". But that expression came back to haunt AMD over the years as prices of fabrication plants soared by roughly one billion dollars each generation, forcing AMD to forge alliances with IBM, Chartered Semiconductor and Taiwan's United Microelectronics Corporation and Taiwan Semiconductor Manufacturing.

By deciding today to forgo its foundries, AMD is now becoming an "ordinary" chip manufacturer, part of the so-call gang of fabless x86 companies, almost all of whom, sooner or later die out or become a blip in the global marketplace. They include Cyrix, IDT, Rise Transmeta and a few more.

But the whole semiconductor and computer industry can't afford to let AMD wane away. Just like Microsoft has found its alter-ego in the Open source movement, Intel has had a long, well documented rivalry with AMD and those who have been in the industry for long enough know that an AMD-less future means going back to an uncompetitive environment.

Back in 1995, before AMD become a potent competitor, the wholesale selling price of Intel's cheapest Pentium Pro - the precursor of the Xeon line - was USD 974, now entry level Xeon processors like the Quadcore E5310 can be had for USD 158.

For those who doubt that Intel will not go back to old, anti-competive habits, a quick glance at the average prices of AMD Phenom processors and Intel Quad Core Processors shows that Intel will not hesitate to hike up prices when it feels that AMD is in trouble.

Case in point. Its Core 2 Extreme Q9775 processor sells for USD 1500 while AMD's top processor, the Phenom 9950 can be purchased for USD 169. (pricing details can be obtained from Pricewatch).

Where does that leave us? Well, no AMD means less competition, which in turn means less innovation and less R&D investment. Plus, obviously more expensive processors. Expect the whole industry (especially the OEM/ODM community in Taiwan) to become even more aware of Intel's clout.

Putting foundries into outsiders' hands mean losing control on key aspects of chip manufacturing, something that Intel is acutely aware of. This increases the risks of errors as more than one party is involved and ultimately brings in new variables that AMD has no control on.

Even if Intel's share prices dropped yesterday to their five year low, expect 2008 to be a spectacular year for the chip giant as it records its first USD 40 billion annual revenue. Intel could decide to go for a bloody price war but anti-competitive agencies on both sides of the Atlantic would probably flag this.

And should AMD wither away, Washington or Brussels might call for Intel to be broken down, just like AT&T. Which, in a sense, is only history repeating itself since both AMD and Intel have their roots in the same semiconductor company, Fairchild semiconductor.