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With the layoff of 10,000 employees (analysts would have liked to see Intel go much further), Intel (INTC) finally has recognized the inroads that Advanced Micro Devices (AMD) has made.

Intel has been on the defensive in its battles with AMD at least since 1995 when the courts decided that AMD could compete with Intel. AMD has shown itself to be a for more formidable competitor than Intel ever imagined. AMD had to overcome many obstacles. The 1995 court ruling did not allow AMD to use a chip set or architecture and design that was compatible with Intel's microprocessor. This meant that it was impossible to just compete on the basis of the microprocessor since AMD's microprocessor could not be designed to fit into the slots set aside for the Intel microprocessor. AMD overcame this obstacle and its lack of manufacturing capacity through a series of alliances with Taiwanese chipmaker Via and with contract manufacturer UMC.

Intel's basic dilemma since AMD's ascendance is its challenge to Intel's core business, the microprocessor upon which Intel still relies for about 80 percent of its profit and revenue. The challenge on two fronts -- price and speed, and in an ideal world it still would like to ignore AMD. It still would like to operate as the near monopoly that it was from 1990-95. It has has to fight a rear guard action against AMD to defend its turf. This rear guard action has prevented it from pursuing entirely new opportunities in new technologies with the intensity that many in the company wished.

The Intel culture is split between its ultra-efficient fabs (fabrication plants) and its very forward looking R&D scientists and technicians. And Intel has not been getting much help from its erstwhile partner Microsoft which has been notoriously slow in bringing out Vista, a new version of its operating software, which would necessitate an upgrading in computing power.

AMD did hit a real home run with its transition chip, the 32-64 bit Hammer/Opteron model, which significantly underpriced Sun in the network market and was fully compatible with old software as well as offering the promise of being good enough for new software that would require 64 bits. Intel got stuck with a bad partnership with HP and concentrated on and introduced the 64 bit only Itanium, which was anything but a hit technically or in the marketplace.

For investors, going forward what are the prospects for the two companies? AMD -- although it has taken off, is finally profitable, and has delivered a real blow to Intel, which Intel is acknowledging with its layoffs, still has not proven that it is anything else but a company that can nip at Intel's heels and take market share from Intel. Is this a sustainable business model? Companies like Pepsi have proven it is only if they have other strengths, in Pepsi's case Frito Lay. AMD has nothing else to rely upon other than challenging Intel. AMD has to demonstrate now that it can push the envelope and be a pioneer or that it can make some type of acquisition that it will give it more strength for the battles ahead with Intel, as it is certain that Intel is sure to strike back at AMD and AMD's margins while a lot better than they have been in the past still are nothing close to those of Intel. If AMD cannot meet this challenge, it probably has peaked as investment. Going forward, AMD's alliance partners, as AMD becomes more successful are likely to demand and extract more of the rents AMD is earning.

On the other hand, Intel too must make some choices, choices that it may not be able to make since it is still between the rock of having to knock off AMD and the hard place of moving the technology to the next level. It is not perfectly clear what that next level will be --- whether Centrino and wireless or dual core or a new architecture or what -- all gambits that Intel has tried to greater and lesser extents with some successes and some wait-and-sees still out there. AMD's current ascendance may be just that, a temporary blip, and the situation may revert to what it was for most of the last five years, a battle that wore down both parties and which neither won. Leadership at AMD is very focused and Ruiz has proved particularly capable while Ottellini at Intel has a much more formidable task of making decisions in a larger organization that has the potential to go in lots of directions and is subject to incredible internal politicking and bickering. Intel is suffering from the curse of its past triumphs. For years now it has been adrift and not able to get the focus and concentration and competitive drive that it displayed when Grove was in the driver's seat.

Investors might be smart to avoid both these companies. Of the two, Intel -- for those with a strong stomach -- may come out of this on top again -- but it will take time and may require a shake-up at the top level of the company with new people coming in who have a more singular vision and who are not forced to compromise on the type of company Intel is going to be and the kinds of competitive battles it will fight. Intel has got to get real serious right away for it to realize the great promise it continues to have, real serious about delivering a blow to AMD so that it will have some breathing space and real serious about what future technological direction it wants to take the company. That direction has to be in an area where Intel has clear dominance and can achieve near monopoly status since Intel works best in an environment where it is a near monopoly and it can refine and extend an existing technology. Intel works poorly when it has to fight a commodity battle with a company like AMD. The pressure on AMD and Intel on the commodity front from computer vendors from Dell and HP to Wal*Mart is not going to abate any time soon.

As an investor, therefore, prudence dictates continued caution with regard to both companies. In the short term AMD has probably peaked and Intel may be a bargain but only if it can figure out where it should be heading and is able to apply its very strong set of capabilities to getting there. In the long run, there is high likelihood that Intel can get this all sorted out but it may take some time and investors interested in Intel may have to be patient. Investors who are not patient can find other companies where the return will come quicker.

Source: Intel vs. AMD: What Intel's Layoffs Mean Going Forward