July 24, 2006 12:00 PM PDT

The one-chip computer at the heart of AMD-ATI deal

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Timna was doomed because the integrated memory controller connected to memory based on designs from Rambus. The memory was supposed to become the standard for PC memory, but manufacturing problems, high prices and other issues grounded it.

"Ironically, AMD's product will end up looking a lot like Timna," McCarron said.

Additionally, AMD will also become a graphics chip maker, which can be a mixed blessing. For years, graphics chips have been one of the toughest markets to make money on in the silicon business. According to McCarron and others, chipmakers have had to come up with an entirely new generation of products about every six months, which is faster than processor manufacturers must do.

To make it worse, graphics chips sell for a lot less than others.

In the late '90s, there were more than 40 graphics chip designers. Most lost money. A series of closures and mergers left the market down to two players: ATI and its rival, Nvidia.

The personalities of the two differed. ATI billed itself as the PC manufacturer's friend, coming out with relatively inexpensive chips on time. Nvidia touted itself as the gamers' choice.

Since then, ATI and Nvidia have grown and largely remained profitable, but the level of competition hasn't abated. ATI, No. 1 in the Internet era, had to delay a few products, and then Nvidia took the lead. Nvidia also got the contract for Microsoft's Xbox game console. Then, whoops, Nvidia fell off the six-month treadmill, and ATI retook the lead.

Margins remain somewhat tight. In its fiscal 2005, ATI sold $2.2 billion worth of chips and make only $17 million, in part because of inventory write-downs. A lot of ATI chips end up in Intel-based computers, so that business might shrink. In the most recent quarter, ATI sold $652 million in chips and made $31 million.

Another ancillary benefit of the deal is that it may give AMD early access to Intel product plans. ATI provides Intel-compatible chipsets. To make chipsets, manufacturers have to be briefed early on processor design and other issues. AMD lawyers may argue one day that excluding ATI-AMD from these meetings constitutes an antitrust violation.

Then again, licensing contracts are thick. Many contain change-of-control provisions stating, essentially, that intellectual property licenses don't pass to the new owners. AMD already has its own dense, licensing contract with Intel, which gets renewed soon, and that may have a provision neutralizing any neutralizing clause in Intel's contract with ATI.

Right now, the answer is up in the air.

"We are evaluating everything. We've got to look at the proposed transaction," said Chuck Mulloy, an Intel spokesman.

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