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Perusing analyst research notes and Intel's (NASDAQ:INTC) financial results a few key facts stick out:
  • Revenue was above expectations by a good bit yet earnings were just above consensus. Translation: The price war with Advanced Micro Devices (NYSE:AMD) is hurting Intel too.
  • Intel may have benefited from a buildup among OEMs preparing for the Microsoft (NASDAQ:MSFT) Vista launch instead of actual demand.
  • Analysts expect Intel to gain market share on AMD – at the expense of profit margins – and that's allegedly a good thing.
  • It's that last item that I just don't get. After a year where AMD's technology was better, Intel still has a market share topping 75 percent. intc vs. amdOf course, it had been at about 80 percent, but it's not like Intel isn't still dominant. Meanwhile, gaining back that market share is going to cost Intel's profitability. Gross margins appear to be down for the long haul at about 50 percent at best.

    "We do not expect the price competition between Intel and AMD to end anytime soon. We expect a painful, prolonged, aggressive pricing environment throughout at least the first half of 2007," wrote Eric Ross, an analyst at ThinkEquity, in a research note.

    In other words, Intel and AMD will duke it out over market share and kill each other on pricing. Intel, which has more manufacturing prowess and scale, will win a long price war barring an AMD leapfrog move, but what's the point? It's like these two chip makers haven't gotten the memo indicating that they have a duopoly.

    "I continue to believe that our shareholders are best served by Intel using its capacity to retake market share that we lost this year," said Intel CEO Paul Otellini on the company's conference call Tuesday night. "Nothing has changed there, except that we perhaps now have a much better product portfolio to do that with. The flexibility and the breadth of that product portfolio gives us a number of pricing options."

    OK, fine, but the chip industry isn't like the auto sector where there are many players scrapping for market share–and trying to topple General Motors, which in turn got consumers hooked on incentives to keep its market share lead vs. Toyota. In the semiconductor industry, Intel could ease up on the pricing pressure, AMD could get some wiggle room and both companies could book more profits.

    That aforementioned duopoly truce wouldn't be good for technology buyers, but you've got to wonder if this price war in a duopoly makes a lot of sense.

    INTC and AMD 1-yr :

    intc vs. amd

    Source: The Intel/AMD Price War Doesn't Make Sense