The Phoney Forecast Game

I've noticed an interesting trend in forecasts for Intel and AMD. No matter how Intel performs the forecasts tend to be positive and no matter how AMD performs the forecasts tend to be negative. AMD has come a long way since it was a full generation behind Intel with the K5. AMD has now caught up to Intel in servers and mobile and in 300mm FAB production. AMD's current position is much more positive than it was five years ago. However, you wouldn't tend to know this from the many biased forecasts that lean toward Intel.

The main difference between a phoney forecast and a genuine forecast is that a genuine forecast is based on a reasonable evaluation of where each company is and is likely to be. These types of forward looking evaluations seek to dismiss things that are not relevant or have little effect. These evaluations can sometimes be counterintuitive because they can take into consideration activity in markets like China which are not as obvious as what is on a shelf in a computer store or what commercials are seen on tv. This is a hazy subject of orders that may have been made months before and decisions made based on the strength of partnerships and profit margins rather than benchmark scores. These types of outlooks are often accurate but dull and sometimes difficult to understand without a background in business.

In contrast, the phoney forecast is often based on a trivial surface view of the market rather than anything in-depth. These forecasts are often grounded in emotion rather than analysis and are never counterintuitive to the author since they are often based on the author's biases more than anything else. The author may be very passionate about this view and feel very deeply that this view states what the market should do (or at least what he wants it to do). These phoney forecasts have been popping up all over the place lately and typically masquerade as genuiune forecasts. The difference can be difficult to tell but one strong clue is when the facts change but the forecast doesn't. In other words, an argument will simply flip flop in order to keep the forecast in line with the current circumstances. When this happens it is a sure sign of a phoney forecast.

For example, Intel supporters were often quite vocal in stating that Intel couldn't lose ground to AMD because Dell was Intel only and Dell had a very high volume. The association of Dell with Intel gave Intel a guarantee of a high volume customer and therefore lots of sales. Curiously, these same people are now saying that AMD is being hurt because of the supposedly low prices it is getting from Dell for its chips. This is an odd argument because these same people were never concerned about the wholesale price to Dell before. This is a good example of a Phoney Outlook. What was a strength for Intel is now flip flopped to become a phoney detriment for AMD. It is simply not reasonable to assume that AMD is hurting its profits by giving away chips to Dell at fire sale prices. This is a particularly odd argument because it is often accompanied by the idea that Intel will sell its massive overstock of Prescott based chips at low, low prices. Supposedly, this will take market share away from AMD. So, what we have is the argument that if AMD is selling at low wholesale prices to Dell that this is bad for AMD and the simultaneous argument that if Intel is selling at low wholesale prices that this is good for Intel. It should be obvious to everyone that there is no real logic in these two arguments.

Similarly, when many Intel fans saw the benchmarks for Core 2 Duo, they proclaimed that this would obviously reduce the demand for AMD processors. This half baked argument of course overlooked the fact that C2D would only reach about 30% of Intel's total production by the end of the year. People making this argument could never explain how the other 70% of Intel's production was going to reduce demand for AMD chips. Nevertheless, this statement has been repeated with great confidence by Intel fans since the first preview of C2D in March. The reality today is that AMD is actually short of chips because its processors are in such high demand that it cannot suppply fill all of the orders. This fact also negates the previous assumption that lower prices for Intel's overstock would also reduce demand for AMD chips. This simply is not happening. However, the current argument is that this is bad for AMD because failure to meet all of the demand will drive customers away. So, the argument has flipped from low demand will be bad for AMD to high demand is bad for AMD. This of course makes no sense. However, it also overlooks the fact that C2D itself has been in short supply and will be in short supply probably until end of Q1 07. It is curious that it is never stated that this short supply of C2D will drive customers away from Intel.

It was frequently suggested (and rightly so) that one of Intel's strengths was its chipsets. The low power chipsets for the Centrino line have given Intel based notebooks much better battery life than Turion notebooks. It was also stated that Intel's chipsets gave them an advantage with certain customers which was also true. Now that AMD is buying ATI it would appear that these would be advantages for AMD as well. However, now the argument has shifted to suggesting that AMD will be hurt by its purchase of ATI supposedly because of the cost. We might at first try to give this argument some credit. However, as Intel has spent down its cash reserves to less than half of what they had at the beginning of 2005 there hasn't been any criticism. Generally, this type of spending of cash is viewed as irresponsible however it tends to get brushed aside in Intel's case with suggestions that it is nothing compared to Intel's revenues. However, it is similarly considered reasonable to borrow money for capital investment as long as the amount is within the expected revenues, which it is for AMD. I would have to agree that while Intel's spending of cash is not great it does fit within their projected revenues and shouldn't hurt. Similarly, AMD's purchase, while large also fits within the projected revenues. I'm guessing that the main result of this will be the delay of the New York FAB. However, the ATI purchase does seem to be more strategic than just building a third FAB and AMD's capacity will increase rapidly anyway in 2008 with FAB 38. The New York FAB could be started late in 2007 and still be finished in time to take up the slack after FAB 38 tops out in 2009. So, it seems to be the case that the argument that AMD will be hurt by the purchase of ATI is just another flip flop of logic to turn a similar strength into a phoney detriment.

The issue of layoffs has been similar. I view layoffs and divestment as a good thing for Intel and something that makes it more competitive. I think AMD's divestment of Spansion was a very good thing and something that Intel should do as well. However, lately we've seen a much different treatment of layoffs between Intel and AMD. As Intel has announced layoffs this has been taken in stride even though most expect that more layoffs will follow. There has been little criticism of Intel and I think that has been correct. However, when rumors popped up about layoffs at AMD this was pounced on as though it were some glaring harbinger of doom for AMD. This is very odd since AMD stated that there would be some layoffs when it merged with ATI because of redundancies. So, basically, unnannounced layoffs by Intel have been no big deal while expected layoffs by AMD are seen as tragic. Something is wrong with this picture.

There are similar phoney arguments about partnerships and markets. For example, it seems to be the subject of great bragging rights when Intel suggests that it has signed X number of companies for initiative Y. These were often mentioned to proclaim Intel's support and standing in the market. However, Intel has driven partners away and seen increasing delays with CSI while AMD has gained traction because of HyperTransport. So, some have shifted this argument to the notion that Intel gains by having fewer partners because it can keep more of the market to itself. In other words, in a classic flip flop it is argued that having many partners means that Intel will sell lots of chips and therefore make lots of money, however it is also argued that having fewer partners and proprietary standards means that Intel will still make lots of money. We see an almost identical argument with licensing. AMD has had no licensing and therefore low cost to use HyperTransport technology. This has been countered by the notion that this is an advantage for Intel because it makes money off of licensing. However, now that it is suggested that Intel may be reducing its licensing costs to try to compete with AMD this is now stated as an advantage for Intel. So, apparently, both high and low licensing fees help Intel.

Growth has been another area of contradiction. If AMD does not grow quickly as happened from 2002 - 2004 this as seen as an indication that AMD cannot challenge Intel. However, AMD's growth in the past two years has been staggering. AMD has doubled in size in the last two years. This is a pace that has exceeded every other top 50 chip producing company in the industry. So, unable to criticize AMD based on growth, the forecasts now concentrate on size and suggest that AMD cannot continue to grow because it is already large. In other words, if AMD doesn't grow it is bad but if AMD does grow it is still bad. In a similar vein some forecasters try hard to associate the best FAB technology with Intel. However, there are two problems with this idea. The first is that AMD's FAB 30 has been the world's number one rated FAB for five years running which is why Intel keeps its FAB ratings secret. The second is that AMD has the very sophisticated APM control system for its FABs which will be a tremendous benefit once it has two 300mm FABs. This will allow production to move from FAB to FAB much more easily than it will at Intel. So, again, unable to associate the best FAB tech with Intel the forecast shifts to capacity and it is insisted that Intel will stay in the lead simply because it has more FAB capacity. Unfortunately, Intel has cut back on its capital spending severely while AMD has increased its by 50%. This would certainly suggest that AMD inteneds to have more FAB capacity in the future while Intel is cutting back.

Those are not the only contradictory gems that have been floating around. There are many others. For example:

If ATI can't sell chipsets for Intel processors then this will hurt AMD because of the loss of Revenue to ATI : If ATI sells chipsets for Intel processors then this will hurt AMD because ATI will be helping Intel.

If AMD can't gain share in the Chinese market this will hurt AMD because this is the fastest growing market : If AMD gains share in the Chinese market this will hurt AMD because this is a low margin market.

If AMD doesn't produce quad core processors soon this will hurt AMD because Kentsfield will be out in November : If AMD starts making quad core processors this will hurt AMD because it will use up too much of AMD's capacity.

If AMD cannot increase its Average Selling Price this will hurt AMD's margins : If AMD increases its Average Selling Price this will hurt AMD's volumes.


It does seem unfair that all of the phoney arguments that I've given are in favor of Intel and against AMD. There is certainly no shortage of biased statements made by AMD fans in favor of AMD and against Intel. However, these statments that favor AMD don't tend to travel very far. It is rare to see something of this nature picked up by the general web press or projected into the forecast of a financial or stock analyst. In contrast, phoney arguments that favor Intel seem to have much more stamina and can be repeated almost anywhere and by anyone on the web including by professionals. Since I don't know of any way to stop the internet press from repeating phoney arguments and outlooks the best thing is to recognize them for what they are and treat them accordingly.

To help illustrate, I'll give an example from Information Week.

AMD Seen Strong This Year, Intel Next

This article with quotes from Merrill Lynch, Citigroup, and Reuters at first appears to be a professional outlook article. However, a closer look reveals that it is in fact phoney. The actual content of the article from Reuters is entirely biased in favor of Intel and simply seeks a rationalization to say that Intel will come out ahead. In other words, the outlook is decided before looking at the evidence and the arguments are simply used to try to fit the preferred outlook into the reality of the data. Essentially, the arguments become an adapter that allows the author to fit the square peg of Intel optimism into a round hole.

The first thing we are told is that AMD's stock has fallen because of fears that Intel's steep price cuts would reverse AMD's gains. This statement is irrelevant. AMD's performance is not directly rated to its stock value. This statement seems to work as a bandwagon fallacy to try to suggest that the author's view is actually common. The author has to use this irrelevant line because what follows does not support his bias.

Price performance continues to be better at AMD, even with all of Intel's pricing cuts.

AMD has been rapidly increasing its share of the PC processor market

Citigroup analyst Glen Yeung said he expected AMD to gain more share in 2007, thanks in part to a new supply agreement with the No. 1 PC maker Dell Inc.

"We expect momentum to favor AMD," Yeung said in a research note. "While the shares have already had a significant move so far in the second half of the year, we believe additional upside is likely through year-end."

At this point, the author has been essentially run over by the statements favorable to AMD. To try to get back to his original favored view of Intel he again talks about stock. He mentions that AMD's stock value is about the same as Intel's when compared with profit. This is statement is not only irrelevant, it is completely ridiculous. Intel moves most of its profits via stock buyback whereas AMD does not. If we were to actually follow his suggestion that the value of the stock somehow indicates a company's future performance then we would conclude that Intel's stock is actually selling for much less than AMD's after we included the amount that Intel spends on buyback. However, there really is no correlation as stock can rise and fall based soley on speculation of future stock value rather than company performance.

Next the Reuters IW author, Scott Hillis, makes a comment:

That's because despite taking a beating in the market share battle, Intel is slashing costs, jettisoning underperforming businesses and launching new chips that are faster, more energy efficient and, crucially, more profitable.

The problem is that this statement is wrong. AMD's biggest liability was its Spansion flash memory business which it divested. Notice that there is no mention of this. In contrast, Intel still retains its own flash memory business. Again, no mention of this. The reality is that it is AMD that has slashed costs while Intel has trimmed. There is no mention of the fact that AMD's chips will be more energy efficient just one month later when it releases 65nm. There is no mention that AMD's K8L architecture will be considerably faster in 2007. Nor is there any mention of the way that AMD's costs will drop all during 2007 as production ramps up on the 300mm process with FAB 36. Finally, the notion that these chips are more profitable for Intel doesn't exactly fit with the previous statement about steep cuts in chip prices. The author is therefore either biased or extremely ignorant of the subject that he is trying talk about. This tends to be the problem where inconvenient facts tend to be rationalized away in favor of pro-Intel biases. There is no reason why anyone should believe arguments based soley on pro-AMD biases however most people are far more likely to encounter arguments based on Intel biases.