Gateway Snubs Intel And Puts AMD Inside

In one of the most stunning examples yet of PC makers breaking ranks with Intel Corp., longtime Intel loyalist Gateway Inc. is preparing to introduce in March PCs based on the forthcoming K6-3 chip from Advanced Micro Devices Inc. The North Sioux City, S.D., company has been evaluating the chip, code-named Sharptooth, for some time, according to sources, and plans to offer the new computer line at prices unattainable when equipped with Intel chips.

More significant than the forthcoming Gateway (NYSE:GTW) systems, however, is the negative impact Gateway's move to AMD, and others like it by Gateway rivals, could have on Intel. "In retail, [AMD] has basically changed the whole business," said Stephen Baker, an analyst at PC Data Inc., a Reston, Va., company that tracks North American PC retail and corporate sales. "Intel is not going to dominate the market again anytime soon. [AMD] is here to stay."

PC makers have been able to price PCs based on AMD's K6-2 significantly lower than those based on Intel (Nasdaq:INTC) Celeron chips, according to PC Data. The average price for an Intel-based PC in December, for example, was $1,195, while AMD-based systems averaged $981. PCs equipped with National Semiconductor's MII chips in December came in at $602. As a result, Compaq Computer Corp.'s Presario 5150, which ships with a 350MHz K6-2, was the second-best-selling retail PC in December, behind the company's Presario 5170, which features a 350MHz Intel Pentium II.

Aiming at corporates
Despite its success in the retail PC space, however, AMD (NYSE:AMD) has not been able to penetrate the business segment. Hewlett-Packard Co. (NYSE:HWP), IBM (NYSE:IBM), Compaq (NYSE:CPQ) and NEC Computer Systems Division do not use AMD chips in any of their commercial brands.

But Gateway's adoption of AMD chips, and AMD's forthcoming K6-3, which is due in March, around the same time as Intel's Pentium III processors, could help change that. After that release, AMD will ship by midyear another chip geared for the business PC, the 500MHz K7. The next-generation chip uses the same whopping 200MHz bus architecture as Compaq's Alpha 21264 processor.

One hurdle AMD will face with the K7 will be getting widespread OEM support for the chip, since the supporting motherboards and chip sets are proprietary. In addition, the Sunnyvale, Calif., company still faces an uphill battle with regard to mind share. "We are very slow adopters [of technology]. At this point, we wouldn't take a look at AMD," said Joe Fischer, a systems analyst at John Hancock, in Boston, and a PC Week Corporate Partner.

Still another challenge is Intel's marketing muscle. For example, Intel, of Santa Clara, Calif., has offered hard-to-ignore incentives, namely the Intel Inside program. The program reimburses OEMs up to 66 percent of their advertising budgets if they follow program guidelines. For PC makers with large volumes, the program can save them millions of dollars in advertising costs. Intel spokesman Howard High declined to comment on unannounced deals but acknowledged heightened competition in the low-end PC space. Gateway and AMD also declined comment.

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