Dell Testing AMD Waters

In the second quarter of 2005, Dell's server and networking division accounted for $1.3 billion, or 10% of the company's overall revenue. Not having an Opteron server puts Dell at a disadvantage when competing for customers on a performance and power consumption basis, notes Insight64 analyst Nathan Brookwood. On the other hand, not everyone cares about performance, and conservative IT managers are perfectly content sticking with the Intel name.

And while Intel's close relationship with Dell allows the computer maker to price its servers competitively with AMD-based servers, Brookwood notes that other financial factors also come into play: because a corporation's back-end data center can handle its workload with fewer Opteron processors than Intel processors, the company saves money on software licensing fees, which typically are priced per processor.

Eventually, says Brookwood, the business case for Opteron processors could become an irresistible force for Dell, particularly since it may not be until 2009 that Intel's server processors will effectively rival AMD's processors for performance and power efficiency.

Other industry experts, however, say Intel could have a competitive server processor out in the first half of 2006, making it possible for Dell to convince corporate customers to hold out a little longer.

Ultimately, though, not everyone is convinced that the root of Dell's troubles is related to the Opteron. "The server issue isn't helping for sure," says Gus Zinn, an assistant portfolio manager who covers technology companies at Waddell & Reed Investment Management, a growth-oriented fund which holds Intel shares. But Zinn says Dell's biggest issue is that it can't meet its margin targets at the low end of the PC market, where much of the growth is.

Moreover, says Zinn, adding AMD chips to the product line would harm Dell's cost advantage, because of the underlying expense of adding a different processor.