Apple

Despite the fact that Apple has yet to produce an iPhone chip based on its own design, and that IBM doesn't design smartphone chips, the judge overseeing the Mark Papermaster noncompete case views the two companies as chip competitors.

Judge Kenneth Karas of the U.S. District Court for the Southern District of New York filed his opinion Monday (click here for PDF) on why former IBM executive Papermaster should not be allowed to join Apple as head of the iPhone and iPod hardware engineering team. Karas' decision to grant a preliminary injunction preventing Papermaster from working at Apple was revealed a few weeks ago, but the reasoning behind the opinion was delayed until IBM and Apple had a chance to review the opinion to make sure it did not disclose any confidential information.

There's no dispute that Papermaster signed a noncompete agreement in 2006 that would forbid him from working at any company deemed a competitor of IBM's for a year following his departure from Big Blue. Papermaster's lawyers are attempting to argue that since the only overlapping product between Apple and IBM--servers--is one that wouldn't be part of his official duties at Apple, and since he won't be running Apple's P.A. Semi chip design team, the noncompete shouldn't apply.

Judge Karas appeared to agree that since Apple's server business is such a small portion of its business and Papermaster will have nothing to do with that group, that experience isn't really at issue. But in his opinion, IBM and Apple are competitors in the chip market because both companies produce or will soon produce chips that wind up in mobile phones--regardless of whether those chips are similar or even whether those chips were designed by company employees.

Of course, the court recognizes that IBM does not sell MP3 players or cell phones that compete with the iPod or iPhone. But, IBM does sell the microprocessor technology that provides the electronic brains for those products and competes for that business. To profit from the manufacture and sale of such products, IBM relies heavily on its "Power" architecture, and has employed Mr. Papermaster as its top expert in the development and application of that technology.

Karas leans on a declaration filed by Rodney Adkins, IBM's senior chip executive, in forming his opinion that IBM's chip group competes for design wins in products like the iPhone and iPod Touch. Adkins wrote, "Steven Jobs, Apple's CEO, told the press recently that 'P.A. Semi is going to do system-on-chips for iPhones and iPods.' IBM designs and manufactures microprocessors suitable for each of those applications." System-on-chip, or SoC, is a term used to describe a single chip that comes with all the technology needed to run a system, such as the applications processor, communications hardware, and other vital parts.

That led Karas to believe that IBM has a healthy business selling similar SoCs for mobile phones or iPods. "Apple announced its intention to have P.A. Semi develop the very type of product that IBM sells to the market generally, and would like to sell to companies like Apple," Karas wrote in his opinion, referring to Adkins' statements.

But IBM doesn't appear to have any customers for those mystery microprocessors referred to by Adkins as potential products for the smartphone market. An IBM representative was unable to provide the names of IBM-designed microprocessors or SoCs for smartphones or handheld computers.

And the Power architecture--where Papermaster's expertise lies--is not a serious player in smartphones or handheld mobile computers like the iPod Touch; the ARM architecture dominates this market. No major smartphone maker uses a Power-architecture applications processor in its phone, and as far as I can tell, none is really considering it.

Power-architecture processors are generally used in products other than modern smartphones or handheld computers.

(Credit: Power.org)

Power.org, the industry organization dedicated to advancing the Power architecture, doesn't even consider mobile phones as potential applications for that architecture. Power-architecture chips these days are found in gaming consoles, telecommunications equipment, and other embedded applications, according to an IBM developer page linked from the Power.org site.

The only way IBM currently participates in the mobile phone market is by making chips for other companies that design the inner workings of the chip themselves. IBM runs a chip-manufacturing business (known as a foundry) for companies that design chips but don't have the billions of dollars required to build and maintain a modern semiconductor factory.

"We manufacture and sell customized chips to specific customers who make products that compete with the Apple iPhone. We do not 'advertise' these specific customized chips since we are dealing with a specific customer. Chips are made to the customer's specification," wrote Fred McNeese, an IBM representative, in an e-mail message.

Those chips do not appear to be the SoCs that P.A. Semi is developing; rather, they appear to be lower-level components that are needed to run modern mobile phones, such as controllers and digital television chips.

It's possible that IBM is worried about Papermaster's knowledge of IBM products or technologies that have not yet come to light. Likewise, power-management techniques that are used in the design of Power-based server processors or the components IBM manufactures could have some applications for P.A. Semi's group.

But the issue here is competition. IBM's position seems to be that even though it doesn't appear to have a single customer for the unspecified processors suitable for mobile computers, IBM is a potential SoC supplier for Apple's iPhone who could be shut out because Papermaster could improve Apple's P.A. Semi team by sharing trade secrets regarding an architecture that Apple does not appear to be planning to use.

It's a bit surprising that Apple waived its right to an evidentiary hearing that would have allowed it to challenge certain parts of the declarations filed by IBM, said John Siegal, a partner with Baker Hostetler in New York. However, that would have probably involved having to put several Apple executives on the witness stand to explain Papermaster's role and the plans of the P.A. Semi organization, and Apple is not known for its willingness to speak publicly about its future plans.

The two parties were to have discussed a schedule for "expedited discovery" and a trial at a status conference last week. It's not known what emerged from that conference; Papermaster's lawyers have declined multiple requests for comment, and IBM representatives have not commented on the conference.

Apple may have a real fight on its hands if it believes Mark Papermaster is the right man to nurture the iPhone.

In an age where employees move between companies as often as relief pitchers change teams, noncompete agreements seem an outdated concept. But lawyers say the noncompete agreement that Papermaster signed with IBM is serious business that demonstrates how companies are increasingly looking to enforce restrictions on their most important employees, and that could force Apple and IBM to share valuable information to make their argument stick.

Getting out of a noncompete
clause isn't easy--unless you live
in California.

IBM is suing Papermaster for violating the terms of a noncompete agreement, which he signed in 2006, when he accepted an offer to run Apple's iPhone group in October. He claims that since he'll be working on a product that does not compete with anything IBM offers, that agreement should not apply. But it may not matter: the agreement he signed contains broad provisions regarding where and how Papermaster could seek employment for a year following his departure from the company, and it's very enforceable in New York, where IBM is based.

The two parties are scheduled to have a status conference later Tuesday, and we could learn as early as then just how determined IBM is to send a message to the rest of the tech industry and its own employees. One sign IBM is taking this case very seriously: It's using longtime legal partner Cravath Swaine & Moore, who represented IBM in the SCO trial, to fight the Papermaster battle.

"These cases are prosecuted as a deterrent to others," said John Siegal, a partner with Baker Hostetler in New York. "In case people are going to be following a high-level executive, (a company) is going to impose limitations to get the rest of the staff to think twice or three times (about leaving)."

Don't fence me in
Covenants not to compete (generally known as noncompete agreements) are perfectly valid everywhere but California, where they have been outlawed. They are generally regulated, however, to make sure they are "reasonably limited to time and space," said Robert Scott, a professor at Columbia Law School and director of the Center on Contract and Economic Organization. That means employers can't keep you on the sidelines for 10 years or allow you to work only on the moon.

The central question surrounding Papermaster's noncompete--and really any noncompete--is whether his activities at Apple would harm IBM. "The court has to find that the noncompete is necessary to protect the interests of the employer," Scott said.

Papermaster signed the noncompete (click here for a PDF copy) in 2006 when after a 15-year career at Big Blue, he joined an "elite" team of IBM managers called the Integration and Values Team (I&VT). He claims the information discussed at the three meetings he attended was "high-level" and didn't involve IBM trade secrets. According to IBM's complaint, however, that group is a collection of 300 senior managers at IBM who are responsible for "addressing the most difficult and important issues facing IBM, such as developing corporate strategy and driving innovation and growth, and I&VT members work with the most sensitive strategic information the company possesses."

But according to an interview that IBM human resources executive Randy McDonald gave just before the company filed suit against Papermaster, I&VT seems more focused on solving the "thorniest" problems that IBM's customers are having integrating technology into their businesses, rather than developing any specific technology. "I&VT is about talking business first," McDonald said during the interview.

Nonetheless, IBM will point out that the agreement covers "any entity that engages in, or owns and controls a significant interest in any entity that engages in, competition with the business units or divisions of the company in which you worked at any time during the two (2) year period prior to the termination of your employment."

So, then do Apple and IBM compete because they both make servers, even though no rational observer of the server market would consider Apple a true competitor to IBM, Hewlett-Packard, Dell, and even beleaguered Sun Microsystems? Do they compete because they both design chips, even though IBM's go into servers and game consoles and Apple's will one day go into iPhones?

It all depends on what the judge considers to be the most relevant issues at hand. "What always happens in these cases is that every company in the world thinks that everything it does is a trade secret," Siegal said. "Under the scrutiny of a judge, that gets winnowed down to real specifics, such as whether the guy was engaged in activities and had knowledge of things that would give Apple an advantage in unfair competition."

And that's where this case could get juicy.

Laying down the cards
"It may also be that this litigation serves some ancillary purpose, that in discovery, one or both of these companies is seeking to find out more about the plans and activities of the other," Siegal said.

IBM and Apple may not want to
share their road maps for the next
year in a courtroom.

IBM will likely have to explain to the judge exactly how Papermaster's specific knowledge harms Big Blue's short-term interests by laying out just where those interests lie. Apple could have to do the same thing to prove that it doesn't plan to use that knowledge to start a new business or improve an existing one, even though it had Papermaster sign an agreement that he would not disclose any confidential IBM information to Apple upon joining the company. "Sometimes in these cases, competitors find out a lot about each other," Siegal said.

As a result, these cases rarely proceed to trial, since the preliminary stages tend to drag on and often the "secrets" at issue aren't worth the prolonged involvement by upper management. Papermaster's hope is that the judge agrees with his claim that nothing in his proposed role at Apple overlaps his role with IBM.

"The court (could then) put restrictions on his conduct for Apple that falls short of an outright prohibition on his working for Apple," Siegal said, satisfying the letter of the noncompete by prohibiting him, for example, from running the XServe group or the P.A. Semi chip team for a year but allowing him to run the iPhone group.

Noncompete clauses don't appear to be going anywhere, despite California's decision to ban them earlier this year. If anything, companies are getting bolder about their use of restrictions like noncompete clauses, Siegal said, which could start to affect more and more of those executives looking to move on from deteriorating situations. And if you refuse to take that next great job because the company requires a noncompete, the employer will likely find somebody who won't hesitate.

"While most states' laws say they are disfavored as a matter of law and policy, the fact is they are very often enforced," Siegal said. "I'm not certain there is a (growing) trend toward enforcement, but there is a trend toward using these agreements and seeking to enforce them."

Apple's iPhone man-in-waiting, Mark Papermaster, has filed a countersuit against his former employer in a dispute over a noncompete agreement.

InformationWeek spotted the court documents filed late Thursday in federal court in New York claiming that IBM's noncompete agreement with Papermaster shouldn't apply to his potential employment at Apple, since the two companies are not competitors in the arena where Papermaster will be employed. In October, Apple hired Papermaster to replace outgoing iPod executive Tony Fadell and lead the development of future versions of the iPhone, but IBM is suing to prevent him from working for Apple for a year.

Papermaster's counterclaim focuses on the clauses of the noncompete agreement, arguing that it is too broad and would not permit Papermaster to work for any technology company anywhere in the world for a year following his departure from IBM.

The "Business Enterprise" restriction is unreasonably broad in that it purports to restrict Mr. Papermaster from going to work for any company that engages in competition with his former business unit to any extent, even if Mr. Papermaster will not be working for the part of the company that does so. Likewise, the "significant competitor or major competitor" prong purports to restrict Mr. Papermaster from going to work for one of these companies even if the work that Mr. Papermaster will be doing is completely unrelated to the work he was doing at IBM. These provisions are not necessary to protect any legitimate interests of IBM.

The Noncompetition Agreement is also unreasonably broad in that it purports to impose an unreasonably lengthy time limitation. In the world of technology, any trade secrets that Mr. Papermaster possesses would lose their value prior to the expiration of a year. The purported geographic scope of the "Restricted Area" is similarly unreasonable. Mr. Papermaster has resided and worked in Austin, Texas for the past 17 years, yet the language of the Noncompetition Agreement purports to restrict him from working anywhere in the world based on the global scope of IBM's business. Again, these restrictions are not necessary to protect any legitimate interests of IBM.

IBM has successfully obtained a preliminary injunction preventing Papermaster from reporting for duty at Apple, but it seems that's a pretty standard decision in cases such as these. The two parties are scheduled to have a status conference regarding the case on Tuesday.

Updated at 4:55 p.m. PST with comment from Apple.

A judge has granted IBM's preliminary injunction aimed at preventing former executive Mark Papermaster from reporting for duty as Apple's new iPhone leader.

Apple hired Papermaster as the new head of iPhone and iPod development earlier this month, but IBM sued Papermaster last week claiming he is violating the terms of a noncompete agreement with IBM in accepting the job at Apple. U.S. District Court Judge Kenneth Karas ordered Papermaster on Friday to "immediately cease his employment with Apple Inc. until further order of this court," according to a filing made public Friday afternoon.

Papermaster had attempted to claim that since he will be heading up Apple's mobile computing division, his role is not one that conflicts directly with IBM's businesses. But something convinced Judge Karas otherwise, although he declined to elaborate, citing "reasons that will be stated in a forthcoming opinion."

An IBM representative was cheered by the outcome, as you might expect. "We are pleased that Judge Karas agreed to our request for a preliminary injunction. Mr. Papermaster's employment by Apple is a violation of his agreement with IBM against working for a competitor should he leave IBM," the company said in a statement.

Apple likewise remained upbeat. "We will comply with the court's order, but are confident that Mark Papermaster will be able to ultimately join Apple when this dust settles," it said in a statement. A representative for Papermaster did not immediately respond to a request for comment.

Judge Karas scheduled a status conference for November 18th "at which it will discuss, and encourages the parties to discuss beforehand, an expedited schedule for discovery and trial."

Mark Papermaster was chosen to lead a team developing future iPhones, even though the company worried about his lack of direct consumer electronics experience.

(Credit: Apple)

Apple knew full well that Mark Papermaster would have to learn his new role as iPod and iPhone chief "on the job" when it hired him.

Papermaster's former employer, IBM, filed a lawsuit against him last week, claiming that he broke the terms of a noncompete contract with IBM in accepting a high-profile job with Apple. InformationWeek spotted Papermaster's formal response Friday morning, in which he declares that the two companies are not competitors and that his experience at IBM is not the primary reason why Apple sought his services.

The court filings reveal the interesting process Apple used to hire Papermaster to replace Tony Fadell, a longtime executive in charge of Apple's iPod group. And contrary to speculation, it appears that Papermaster--a well-respected chip executive--will have nothing to do with chip design at Apple on Day 1.

Apple began searching within the consumer electronics industry in October 2007 for a lieutenant and eventual successor to Fadell, but it couldn't find anyone it liked, according to the court filing. Instead, the company decided to search for an executive with strong overall technology skills who would be a good fit inside Apple, modeling the search on the process used to find current Mac hardware leader Bob Mansfield.

Mansfield was the one who suggested Papermaster as a candidate, though he didn't exactly roll out the welcome mat for his college buddy. On a list of potential candidates sent to Vice President of Human Resources Danielle Lambert (who is married to Fadell), Mansfield described Papermaster: "Mark fits the bill wrt (with respect to) systems and semiconductor understanding, but in every other way is a long shot."

Nonetheless, he was brought into Cupertino in February 2008 to interview with CEO Steve Jobs and Fadell. Apple liked Papermaster in many ways, but it wasn't sure that his experience in server development was the proper background for the role--especially in light of the fact that in February, Apple was working hard on getting the iPhone 3G out the door, and it wanted someone who could hit the ground running.

However, as Lambert said in a statement attached to Papermaster's response, "nobody questioned Mark's ability to lead a development team." The company offered him a role designing laptops, and while Papermaster was intrigued by the possibility of working at Apple, he wasn't all that crazy about that particular role.

But after Apple got this year's crop of iPods out the door in September, the search for Fadell's replacement intensified. Papermaster was offered that role, and he jumped at what he called "the opportunity of a lifetime."

As Papermaster sees it, his role is fairly narrow: he's tasked with overseeing the development of iPod and iPhone hardware. He won't be working on personal computers, he won't be working on servers, and perhaps most surprisingly, he won't be working on microprocesors.

Papermaster's court filing says the P.A. Semi team acquired by Apple earlier this year is part of the group managed by Mansfield, not part of the iPod and iPhone group. That's a surprising organizational decision, given that Jobs has said publicly that P.A. Semi was brought into the fold to work on chips for the iPhone and iPod Touch.

Despite a career spent developing chips at IBM, Papermaster supposedly won't have anything to do with Apple's budding chip team.

(Credit: CNET)

The filing notes that Apple currently acquires iPhone microprocessors from an outside vendor, widely believed to be Samsung. Unsurprisingly, it stops short of mentioning whether or not Apple plans to eventually design and develop its own microprocessors for that product, as seems evident.

In a declaration accompanying the formal court response, Papermaster notes that "it is also my understanding that I will not be responsible for developing the microprocessors that are used in the iPod and iPhone products, but rather those will be procured from sources outside my group." Whether those sources are outside Papermaster's group but inside Apple is left unstated, but Papermaster also says, "I will be acting solely as a product manager--I am not being hired to develop technology across product lines."

An Apple representative declined to comment on Apple's organizational structure or the court filings, only to say, "We think IBM will see that the iPod and iPhone are not competitive with their business." IBM likewise declined to comment on Papermaster's response beyond the statements they have already made regarding their intention to "vigorously" pursue the case against Papermaster.

Papermaster's argument against the lawsuit is that since Apple and IBM aren't true competitors, and since he isn't working on the small slice of Apple's business--servers--that does overlap with IBM's business, the noncompete should not apply. Likewise, he believes that he's not in a position to divulge any IBM trade secrets because "Mr. Papermaster's position at Apple will involve a completely different product using different technology that Mr. Papermaster will have to learn on the job."

It's quite possible that Papermaster's lawyers are deliberately downplaying his connections to Apple's budding chip design team in order to make this lawsuit go away, since the chip angle is IBM's only real argument. Even if Papermaster isn't directly involved on a day-to-day basis with the P.A. Semi team, he will be in charge of specifying the hardware requirements for the iPhone, and part of that includes the chips that go into that system.

Apple appears to be making a bit of a gamble with this hire, entrusting the care of what has become its most important product to an executive who, though well-regarded, has no experience working inside the fast-paced consumer electronics industry. And the most relevant part of his IBM experience doesn't appear to be part of his marching orders at Apple.

But the company believes that his leadership skills will serve him well at Apple, according to one of the court filings: "Apple has hired Mark Papermaster because he has strong general engineering skills, is an outstanding leader, and because we believe he will be a good cultural match at Apple."

Apple's decision to hire Mark Papermaster away from IBM could mean that its Xserve lineup is taking on a more prominent role.

(Credit: Apple)

Updated throughout at 4:55 p.m. PT with additional details and comment from IBM.

One of IBM's top chip executives has agreed to join Apple as a senior executive, but he might have to fight off his former employer first.

Mark Papermaster, until recently IBM's vice president of microprocessor technology development, plans to join Apple in early November in a position that will see him working closely with Apple CEO Steve Jobs in what IBM believes is an attempt to expand Apple's presence in the markets for servers and chips for handheld devices, according to the copy of a lawsuit filed by IBM against Papermaster. IBM is suing Papermaster to prevent him from joining Apple and divulging trade secrets related to IBM's Power chips and server products, according to the complaint filed in the U.S. District Court for the Southern District of New York.

Papermaster has authored several papers on chip development at IBM, which of course used to make PowerPC processors for Apple before the company switched to Intel's processors in 2005. IBM called Papermaster "IBM's top expert in Power architecture and technology," and his most recent position involved managing IBM's blade server division.

An Apple representative declined to comment on the lawsuit or confirm Papermaster's pending employment with the company. IBM issued this statement: "Mr. Papermaster's employment by Apple is a violation of his agreement with IBM against working for a competitor should he leave IBM. We will vigorously pursue this case in court."

If Papermaster is able to successfully join Apple, he'll be working closely with Apple CEO Steve Jobs "providing to Apple technical and strategic advice on a variety of issues," according to IBM's complaint. But which issues?

Apple's Xserve servers haven't exactly been a high priority over the last couple of years, as Apple has switched the Mac to Intel's processors and rolled out the iPhone. But a spruced-up Xserve blade server could be a nice complement to the Mac if Apple ever gets serious about tackling the enterprise market.

Still, Illuminata analyst (and CNET contributor) Gordon Haff believes that Apple is unlikely to plunge back into the server market headlong after successfully pulling off the transition from a computer company to a consumer electronics company. Apple appeared to be serious about the server market when it launched the Xserve earlier this decade, but has spent less and less time extolling the product over the last two or three years, he said.

Papermaster's hire could signal Apple's intentions to build out a cloud-computing infrastructure to support things like MobileMe, or future services along those lines. Dense-but-powerful blade servers are being eyed by many companies as they build out the data centers of the future, and if Apple ever wants to be a major player in the future of Internet-delivered services, it's going to need a lot of computing power at its disposal. Papermaster's expertise in system design--putting together the entire package of processor, chipset, and the rest of the guts that form a computer--could serve him well at a company that prides itself on soup-to-nuts design.

As an extremely well-respected figure in the clubby world of chip design, Papermaster might also be stepping in to lead Apple's chip design efforts. Apple's acquisition of P.A. Semi earlier this year showed the company is very serious about chip design. Jobs told The New York Times that P.A. Semi would be used to build chips for the iPhone and iPod Touch.

Papermaster's expertise lies with the Power architecture, of which Don Dobberpuhl's P.A. Semi team is also well-acquainted. The primary role for the Power architecture these days is in gaming consoles--all three major gaming consoles use a chip based on the Power architecture--but that doesn't necessarily mean Apple has that goal in mind, either.

If Apple wants to continue its strategy of designing and building complete systems, hardware, software, and now chips for iPhone and iPod Touch, it's going to need someone who can predict the future of chip design and advise Jobs and Apple's executive team on how Apple can best take advantage of those trends. Papermaster, with a unique set of skills in the tech industry, might be just that guy. "They probably need somebody with an experience set that doesn't exist at Apple today," Haff said.

It might take a fight in order to bring him on board, however. IBM's decision to sue Papermaster hearkens back to the dispute between Google and Microsoft over Google's decision to hire Kai-Fu Lee away from Microsoft to run Google's research operation in China. The two parties eventually settled out of court.

Noncompete clauses are generally considered worth less than the paper they are printed on in California--Apple's home state--but different states are more strict. Google and Microsoft fought much of their battle over whether the case would be tried in Washington state or California.

In the final reading, Papermaster's hire might wind up as a partial solution to all those questions over what Apple should do with its pile of cash: give a chunk of it to IBM to make this case go away.

IBM has released iNotes Ultralite for getting Lotus Notes e-mail onto the iPhone.

(Credit: IBM)

IBM has released a way to get Lotus Notes e-mail on your iPhone that stops short of full support, but gets the job done.

IBM's iNotes Ultralite (no trademark fight necessary) will be formally released Tuesday for Notes administrators and iPhone users. The software is a Web application that allows you to access Notes mail through the Safari mobile browser on the iPhone. Administrators need to install IBM Lotus Domino Web Access 8.0.2 in order to make the whole thing work.

One of the more popular additions to the iPhone 3G was the support for Microsoft's Exchange technology, which allows you to get your corporate Exchange e-mail on the iPhone's Mail client. IBM and Apple haven't inked a deal to do the same thing for Notes as of yet, but an IBM representative said the two companies are working to bring the Lotus Notes Traveler software to the iPhone.

iNotes Ultralite is a free download from IBM.

IBM and Research in Motion are expanding the reach of IBM's Lotus software onto BlackBerry handsets.

BlackBerry users can now access the Lotus Connections software right from their handhelds.

(Credit: IBM)

BlackBerry users in companies committed to IBM's Lotus suite of software can now access the Lotus Connections software from their handhelds, the companies plan to announce Wednesday at the Wireless Enterprise Symposium in Orlando, Fla. Lotus-equipped companies have long been able to deliver e-mail, contacts, and calendar appointments to BlackBerry users, but companies can now allow their workers to get Web 2.0-ified in a safe, staid manner formally approved by the IT department.

Lotus Connections lets you pick the brains of experts inside your organization through their internal blogs or documents, said Bob Picciano, general manager of IBM's Lotus Software. "You don't want people putting (sensitive) documents on LinkedIn," he said, explaining the need for secure social networking.

RIM has been expanding its attempts to reach consumers with devices like the BlackBerry Curve, but its bread-and-butter is still the corporation. The Connections software is supposed to be immediately available for Lotus users to download.

AMD could finally be getting ready to explain how it intends to build chips in the future, almost a year after dropping hints that it would revamp its manufacturing strategy.

Hans Mosesmann, an analyst with Raymond James, believes AMD is about to reveal a new manufacturing strategy that will attempt to take some of the formidable costs out of making chips. Mosesmann thinks that AMD is considering spinning out its manufacturing operations as part of a joint venture with another company, making greater use of partners such as IBM and Chartered Semiconductor, or some such combination.

An AMD representative declined to comment specifically on any actions it might be considering, but said even though the company has been working on this issue for a year, no decisions have been made.

Company executives have steadily refused to explain what "asset-light" (which soon morphed into "asset-smart") actually means, but have hinted that it involves a rethinking of the way AMD develops chips. The term first surfaced during an earnings conference call in April as Chief Executive Hector Ruiz described vague, tentative plans to reduce costs by thinking of new ways to get chips built and out to customers.

There might not be a more costly undertaking in the modern technology industry than the process of designing and manufacturing high-end PC and server processors. Only six or so companies really do it in high volumes (Intel, AMD, IBM, Sun, Fujitsu, and Via). Modern chip plants cost billions of dollars to construct and maintain, and researching new leading-edge transistor designs is enormously complicated and time-consuming, and therefore expensive.

That equipment--and those suits--cost an awful lot of money, and AMD is looking to cut costs.

(Credit: Sven Doering/AMD)

Even in boom times, AMD's pockets are not nearly as deep as Intel's, yet it has to spend the money to keep up. To date, it has gotten around some of the need for huge outlays by working on advanced research and development in a facility owned by IBM, using third-party chip foundries like Chartered Semiconductor and TSMC, and making the most of what capacity it does have in Dresden, Germany.

But AMD's pockets are even lighter right now. Intel has recovered from its mid-decade swoon and is chugging along without incident, while AMD has watched its fortunes spin completely around in about a year. AMD can't continue to lose money forever, and one way to cut costs is to embrace that tried-and-true 21st century management strategy: outsourcing.

Expect AMD to line up a new partner for manufacturing and/or research, expand its relationship with IBM, or accept another cash infusion from its new investor, Abu Dhabi, Mosesmann said in an interview. "They have to be competitive without having to spend billions each year to keep up with Intel," he said.

Don't expect AMD to get out of the chip manufacturing business entirely. After all, "real men have fabs." All bravado aside, there are plenty of good reasons to keep a great deal of manufacturing in-house, everything from quality control to customer flexibility.

And the thing is, AMD can only go so far. Under the terms of a licensing agreement it signed in the early 1990s (AMD licenses the x86 instruction set from Intel), AMD is prohibited from outsourcing more than 20 percent of its production.

That might not necessarily hold AMD back, Mosesmann said.

"There are some issues that have to be overcome, and AMD might be able to overcome them by saying we don't care," he said. In essence, AMD could dare Intel to sue it for violating the agreement, hoping to work out some sort of settlement further down the line when it's in better economic shape. Their lawyers talk on a regular basis already.

This is a huge, huge year for AMD's current management team. After the debacle that was 2007, Ruiz has pledged to make AMD a profitable company in the second half of 2008.

If the company has trouble making the revenue side of the ledger increase amid tough economic conditions, it's going to have to do something about the cost side, which could involve layoffs, a new manufacturing strategy, or both.