Apple

SUNNYVALE, Calif.--Apparently sometimes, you just can't say no, even when you know it's going to hurt.

That seems to be where AMD finds itself, as it tries to reconcile a draining price war against the high demand for its chips. Intel has been squeezing AMD's margins for over a year through processor price cuts, but AMD has still managed to expand its foothold inside customers like Dell and gain new customers like Toshiba.

The problem is that much of that growth is coming at the low end of the market, where less profits can be had. Intel's decision to build quad-core chips more quickly than AMD has resulted in an "unfair fight" in which AMD has to compete against Intel's quad-core chips with dual-core chips, said Henri Richard, executive vice president and AMD's chief sales and marketing officer. It's the exact opposite of AMD's experience in 2005 in which it had dual-core server chips, and Intel didn't.

Right now, that means AMD can't play in the more expensive bands of the PC and server market since it doesn't have the quad-core chips. But does it mean that it has to dig itself more of a profit hole by pursuing market share on the low end of the market?

New customers like Dell and Toshiba require that AMD get that relationship off on the right foot by meeting their needs, Richard said. "We have customers, they are asking me to supply them with the products they need, and I can't just say no," he said in comments to reporters after AMD's Technology Analyst Day.

With all due respect, Henri, why not? Cutting prices to obtain market share has been an unfortunate part of AMD's history for years, but when CEO Hector Ruiz took over the reins from founder Jerry Sanders it seemed that the company had changed its tune.

Market share means a lot, but if you can't make any money selling products at that price, why take that deal? Dell had to learn this lesson in the PC market, ceding the lower unprofitable end of the market to other companies with leaner operating models.

The problem, of course, is that in this market there are only two suppliers. (Sorry, Via.) If Intel was unwilling to meet Dell and Toshiba's pricing demands, and those two PC makers turned to AMD, it would have been very hard for AMD to say no and disappoint the last two major PC companies on its wish list. Demand for AMD's chips soared in the second quarter compared with the first, but average prices did not improve.

Still, investors demand profits. "We're not chasing share for share's sake," Richard said. The company believes it can erase its losses and improve its average selling prices with the launch of its quad-core Barcelona chip in August, and new chips for desktops and notebooks over the next several months.

But the situation underscores how some parts of the PC market still see AMD in many respects: as the low-cost provider. AMD is working hard to change that perception, but a reputation can take awhile to shake.