Skip to main content

To their customers, Intel (INTC) - Get Intel Corporation (INTC) Report and Advanced Micro Devices (AMD) - Get Advanced Micro Devices, Inc. Report are sources of both microprocessors and cash, providing the chips that go into desktop and notebook computers, as well as doling out funds to help PC vendors advertise their machines.

But in a changing and challenging tech environment, these ad subsidies may become as endangered as last year's single-core processors.

According to several PC vendors, the two chipmakers have recently slashed funds provided through their respective co-marketing programs. In the case of AMD, the new funding levels are one-third below what the company previously gave PC makers.

The cuts come as Intel and AMD are engaged in a fierce price war, forcing them to make up for falling revenue by finding cost savings wherever they can.

This also underscores the shifting nature of the microprocessor business, which is prompting chipmakers to reconsider long-held practices and strategies.

"It's still a very high gross margin business for both companies, so they can afford

the co-marketing subsidies if they thought it was doing them good," says Insight64 microprocessor analyst Nathan Brookwood, upon being told of the changes. "The fact that they're cutting back suggests that maybe they're rethinking that."

Indeed, Intel has wielded the famous Intel Inside co-marketing campaign for more than a decade. But despite all the marketing firepower it has provided, AMD has managed to gain a solid foothold in the microprocessor market.

According to Mercury Research, AMD captured 21.6% of the microprocessor market in the second quarter of 2006, up from 16.2% a year ago. Intel's market share, meanwhile, has slipped to 72.9% from 82.2% a year earlier.

"The assumption was that the Intel Inside program would be a competitive defense against companies that did get their act together, and I think so far the data suggests that it's not doing its job there," says Brookwood.

The co-marketing program of Intel and AMD's younger version operate along similar lines: Every time a PC vendor buys chips, each chipmaker refunds a portion of the sales price by putting it into a special account for that vendor. The PC vendor can use the money that accrues to help pay for their print, TV, Web or other type of advertising.

Of course, the ads have to meet certain criteria, chief of which is trumpeting the fact that an Intel or AMD processor is under the hood of the machine being promoted. Vendors who promote premium brands, say Intel's Centrino platform, can allocate more of the money in their account to pay for an ad.

The co-marketing programs are a critical source of cash for many of the smaller PC vendors that compete against giants such as

Dell

(DELL) - Get Dell Technologies Inc Class C Report

and

TheStreet Recommends

Hewlett-Packard

(HPQ) - Get HP Inc. (HPQ) Report

, says Roger Kay, president of the market research firm Endpoint Technologies.

"Those programs are keeping a lot of OEMs alive," he says.

According to a couple of U.S. PC vendors, though, AMD recently slashed its co-marketing funding by one-third, providing a 4% rebate for advertising instead of the 6% it previously offered.

An insider at one of the vendors, speaking on condition of anonymity due to the confidential nature of the program, said that AMD cited the extremely competitive nature of the business environment in justifying the lower rebate levels, which took effect in August.

Another PC vendor said that Intel recently pared back its co-marketing rebates from 5% to 4%, the first such downward change to the program that he recalls in years.

Intel spokesperson Chuck Mulloy says his company is always adjusting the program in accordance with the company's business strategies and business plans, but that Intel does not comment on specific details of the program.

"It's really between us and our customers," says Mulloy.

AMD confirmed that it has reduced its co-marketing refunds down to 4%, in response to similar moves by Intel, but said it was not an across-the-board cut.

Stephen DiFranco, VP of consumer sales and marketing at AMD, said the lower marketing refund levels reflect a maturing PC industry, in which computers are less expensive and more widely available.

But he stressed that AMD remains committed to the co-marketing program. "We believe that cooperative marketing is a good way to work closely with our OEMs to bring their products to market," DiFranco said.

The true size of the co-marketing programs are unknown as neither Intel or AMD break out the costs in their financial statements. Brookwood analyzed Intel's co-marketing program a few years ago and estimated that through the year 2003 the chipmaker had spent between $1.5 billion and $2.5 billion on the program.

Mercury Research's Dean McCaron says it's not inconceivable that Intel's co-marketing program could now be "the better fraction of a billion dollars a year," based on the company's sales figures and its overall marketing expenses.

Whatever the amount, the marketing subsidies represent a significant expense at a time when plummeting microprocessor prices are forcing the two chipmakers to cut costs.

After three consecutive years of double-digit revenue growth,

Intel expects 2006 sales to be down 3% .

When Intel announces its third-quarter results next week, gross margins are expected to be 49% -- a low-water mark for a company which at this time last year reported a 59.7% gross margin (61% excluding a legal settlement).

AMD is also under the gun as it responds to Intel's aggressive price cuts.

The company missed Wall Street revenue expectations in the second quarter, and posted declines in both its microprocessor unit shipments and its gross margin.

AMD has vowed to hold the line on operating expenses for the third quarter, even though its marketing, general and administrative expenses increased 21% sequentially during the second quarter of the year.

"Saving that

co-marketing money is something that would go essentially to the bottom line," says Mercury's McCaron.

And cutting back on co-marketing refunds doesn't carry the same negative connotation as making cuts to the more sacred research and development.

True, the battle for mind-share between Intel and AMD is more intense than ever. But some analysts question whether the co-marketing dollars pack the same punch that they once did.

"It's a much more competitive market, margins are under pressure, and the advertising and branding is pretty well established at this point," says McCaron. "I suspect that the money is better spent elsewhere or not spent at all."

Intel's Mulloy says that parts of the co-marketing program will be evaluated, along with everything else at the company, as Intel undertakes a broad restructuring designed to save $2 billion in 2007. But he says the company doesn't have any immediate plans to scrap the entire program.

That's good news for PC vendors, even if for chipmakers it could amount to money for nothing.