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It’s been a long time coming, but AMD said this morning that it has entered into a transaction with the Advanced Technology Investment Company of Abu Dhabi to create an independent semiconductor manufacturing foundry called The Foundry Company. As part of the spin-out of AMD’s fabrication plants into this separate entity, AMD raised $1 billion in capital and got rid of about $1.2 billion in debt.

The move has been anticipated for over a year, as AMD has struggled to stay afloat amid production delays and brutal pricing from rival Intel. Last quarter, it reported a $1.2 billion loss. AMD finally had to admit it couldn’t keep up with the costs of building a $3 billion-$4 billion fab each time it wanted to shrink its chips and gain some economies of scale in manufacturing. That’s a business model that has moved on. Now most companies have created manufacturing partnerships, or are fabless, meaning they outsource the building of their chips to a third party.

The Foundry Company will join the ranks of those firms, and will be 44.5 percent owned by AMD and 55.5 percent owned by ATIC, an independent fund capitalized by the government of Abu Dhabi. ATIC will make a $5.7 billion investment into the business to build out a planned fab in upstate New York and finish out a fab in Dresden. This is the first major investment for ATIC. It will also invest $700 million in AMD.

The ATIC has also brought in the Mubadala Development Co. to help operate the fabs for the next 12 months. Mubadala made a $622 million investment in AMD last year, becoming an 8.1 percent shareholder. Today it said it would invest $314 million to eventually own 19.3 percent of AMD.

Doug Grose, the former senior V-P of technology development, supply chain and manufacturing for AMD, will lead the new company. Hector Ruiz, former CEO of AMD and its current chairman, will become chairman of the new company, leaving his position as chair of AMD. A new AMD chairman has not yet been selected.

Some problems I see with the deal:

• New York State has promised $1.2 billion in assistance to AMD if it builds its fab in New York. The state does not have an agreement with The Foundry Co. Given the economic uncertainty and the foreign ownership of the new business, that assistance may change (although it wouldn’t likely disappear altogether.)
• Because AMD has a 44.5 percent ownership stake in the fab it has some disincentives to negotiate hard for better wafer pricing. That could hurt AMD’s bottom line.
• AMD has a licensing agreement with Intel that allows it to manufacture x86 chips. AMD says this deal fits within the confines of the Intel licensing agreement, but further details about that agreement would help investors understand exactly how it may limit The Foundry Co.’s ability to cut costs and expand.
• AMD uses other foundries to make some of its chips. As a majority owner of a competitor, how will other foundries treat AMD’s wafers?

image of Dresden fab courtesy of AMD

A study out today from research firm iSuppli shows that operating margins in the chip industry have declined from the upper teens to the single digits, making the industry more cutthroat than ever. The numbers paint a grim picture for AMD, Freescale and NXP, all of whom are still struggling to get out of the old-boy (and expensive) mentality that only real men have fabs.

That adage, pushed by Jerry Sanders, the founder of AMD, defined chipmaking (and all chipmakers) for years, and saw companies such as IBM and Intel race to build the latest manufacturing plants to churn out ever smaller chips on ever bigger wafers. In the early part of this decade the prevailing wisdom shifted to say that only the top 10 chipmakers should own fabs. We’re about to cut that number again.

A fab can cost up to $4 billion to build and equip, making it a game few can afford to play. In Dallas, for example, a 300mm fab built by Texas Instruments stands empty. Many firms have transitioned to an asset-light model in which they manufacture some semiconductors in their older, existing plants and farm out the newer designs to foundries, which are essentially outsourced fabs.

But some are still making the transition, most notably AMD, which has been struggling for more than a year to define its asset-light strategy. Ever since AMD kicked out CEO Hector Ruiz a few months ago, Wall Street and plenty of AMD employees have been waiting to hear details of the chipmaker’s own plan to cut back on fabs.

The iSuppli report grimly states that the semiconductor industry has lost its “money-making touch,” but I think it’s missing the point. Making chips might be less profitable, but designing and controlling intellectual property around chips is still helping firms such as Qualcomm and MediaTek outperform their peers, according to the report.

So perhaps the better conclusion is that if you don’t want to be stuck with commodity margins, you’ve got to get out making a commodity product (which is what large scale chipmaking is built on). After all, even Intel will one day encounter a fab so pricey it doesn’t justify the cost of building it. That’s the way economics work. The value isn’t always in the manufacturing, but in the design. Ask Apple. Or Dell.

Despite reporting a second-quarter loss last night, due in part to costs associated with the faulty packaging on some of its chips placed in thousands of laptops, Nvidia still has a plan for semiconductor domination through the GPU. But if it wants to execute, it needs to accept the realities that come with stepping into a competitive market. The earnings call shows Nvidia still has a lot to learn.

In yesterday evening’s call, CEO Jen-Hsun Huang admitted to a $196 million charge because of problems with its GPUs in some laptops. He also talked about some pricing mishaps that occurred as AMD pushed out a highly competitive product with a lower price. Nvidia is learning, but there are two bright spots in the call, related to its Tegra chipset for mobile Internet devices and smartphones and bringing high-level parallel processing to the consumer.

Huang said Tegra wouldn’t be shipping in products until next year (something he told us earlier this year in an interview), but growth from CUDA on laptops and desktops should have an impact over the second half of this year (which will be the second half of fiscal 2009 for the firm). CUDA is a programming tool that allows software coded in C languages to run on the multiple cores in a GPU. It helped the company make inroads in the scientific computing community, and thanks to software from startups such as Elemental Technologies, the goal is to bring that level of parallel processing to consumers.

“We can’t just keep selling chips that make graphics run faster and cheaper. I mean, that’s all very nice and it’s all good but we need to advance the visual computing field in some remarkable and important way, and parallel computing is one of the most important investments that we are making,” Huang said on the call.

Such a shift, if well executed, will bring a level of power to computers that has been reserved for research institutions and mainframes. The next laptop you purchase could very well be able to analyze real-time trading data and spit out investment decisions. The key will be building software that’s designed to take advantage of it.

image courtesy of Nvidia

According to the Wall Street Journal, Google may be trying to build out a corporate venture capital arm similar to other strategic venture groups at companies ranging from Intel to Motorola. The Journal reports that Google SVP David Drummond will be in charge, and that the search giant has hired 33-year-old former entrepreneur and investor William Maris to help.

Since Google already invests in plenty of companies, from Current Communications to 23&Me, the genetic information company run by Sergey Brin’s wife, I don’t think this news it terribly new or exciting. It also has a program in place for clean and renewable investments as part of its philanthropic arm. And so far, its track record as an investor has been unproven or weak given issues faced by portfolio companies. Current faces lackluster BPL use, Meraki is trying to stay relevant and electric vehicles are still far out there.

When a company sets up a venture arm it needs to decide if the investments it makes are part of a money-making effort similar to the way Intel now invests its capital, or to push product lines or ideas. Google already invests in companies to further its technology goals, so it may be looking for a strategic arm to create financial returns.

The downside of setting up a formal investment arm is that investing in startups is a long-term effort and many public companies are driven by short-term results. In tough times, it can be hard to write down the value in the portfolio, as Dell and Boeing discovered after the crash. They have both discontinued their strategic investment groups.

Update: To create a successful strategic investment group a company really needs to focus, something Google has not historically done well. If the goal is to complement and push Google’s technology efforts, the comapny needs to figure out what those efforts should be, and ferret out the best startups in that sector. If the fund is motivated by returns, then Google will need to temper its desire to only get involved with the best, the brightest and the hottest items right now (You know like accepting a $17,000 a year daycare instead of $30,000), because valuations on those deals can be sky high. I’m not terribly optimistic that Google has the discipline to handle strategic investing, or even if it really should.

photo of David Drummond courtesy of Google

AMD isn’t going after the mobile Internet device market that Intel and other chip vendors are eying. AMD’s senior VP and chief marketing officer, Nigel Dessau, told eWeek, “What we are saying is that we are a smaller company and we have to focus on what we do well at this point. We are watching that segment rather than playing in it, but as it matures we’ll see where it goes.” Sounds like a good plan for AMD, which already has chips that might work for Netbooks and needs to focus on righting itself.

Confession: Back when AMD was pitching its Opteron chipset, I convinced my husband to buy shares in the company on the belief that its plans to build a backwards compatible 64-bit processor was so obviously better than Intel’s efforts with Itanium that the market would eventually see it. The market did, and AMD shares went up a bit, but we soon sold them after my company changed its policy regarding stock ownership.

I say this so you guys know that I once believed in AMD. I live in Austin, where the company at one time employed more workers than in its Sunnyvale headquarters. Where Hector Ruiz, who stepped down today from the president and CEO position, lives. But I look at the sad wreck that was once a scrappy upstart irritating Intel and I don’t know what to say. I can start with the facts.

Ruiz will remain as executive chairman of the company and Dirk Meyer, the former COO and president, will become the CEO and president. Ruiz had already named Meyer as his successor, but Ruiz had also said he would stay through 2008. But AMD had seven quarters of losses and wrote down $878 million last week (for a total loss this quarter of $1.2 billion).

Meanwhile, Meyer will preside over the sale of some of AMD’s consumer assets, as announced in the company’s fourth-quarter conference call on Thursday. These assets should include some of the non-core assets related to mobile and digital television AMD purchased as part of its ATI acquisition in 2006. Those are the facts.

Looking at those facts, and the string of things that have gone wrong, from delays with its Barcelona chip to the loss of its CTO earlier this year, and you have to wonder if Meyer, or anyone inside the company should really be the one to take over. Ruiz and Meyer are both known more for their engineering talents than their business ones, which may be one of the reasons AMD held onto non-core divisions for so long. I suppose I should stop caring. After all, it’s been years since I held stock in AMD, and it gets old rooting for the underdog.

You wouldn’t think that next year’s DreamWorks movie, “Aliens vs. Monsters” and the search for more crude would be connected, but they are — in that they both take advantage of parallel programming for multicore chips. And when it comes to multicore chips, big bucks are on the line as the chip firm or software company that figures out how to write code to take advantage of them stands to make boatloads of money.

DreamWorks signed a deal with Intel this week aimed at parallelizing some of its code running on multicore chips to enable 3-D imaging for the 2009 animated movie. It’s not the first company to work with Intel to get more out of the multiple cores now embedded in servers, but it’s a nice example of how Intel is pushing its multicore efforts beyond simply throwing a bunch of chips at a computing bottleneck.

Like other chip firms, Intel knows that to keep compute power on the rise (and customers happy) it has to not only make the hardware more powerful with multicore chips, but also teach programmers how to use them. Otherwise, multicore chips don’t reach their full potential. James Reinders, director of marketing for Intel’s developer products division, pointed out that much of the work Intel was doing with regard to multicore, including investing in software research, selling tools to make parallel programming less cumbersome and participating in standards bodies, was done to deliver more computing power — something that can no longer be done efficiently by increasing clock speeds or adding even more cores.

“Every generation of hardware offers new capabilities, and we have rewritten our software to take advantage of it over time,” Reinders said. “Multicore will inspire us to do the same thing, but it won’t be overnight.”

It’s possible that the chip companies will be the vanguards of a new style of programming, much like programmers had to learn how to program for the web, graphical user interfaces or even e-commerce applications. Paula Richards, director of IBM’s Cell systems business thinks so. The Cell processor, designed for the Playstation 3, contains nine cores and also performs better if you adapt the code to take advantage of it.

So far IBM has focused on selling the Cell processor into financial firms, hospitals, and oil companies like Spain’s Reposal Repsol, which it inked a deal with last week. Richards said IBM doesn’t just dump that hardware and run — it spends time working with clients in each vertical to build software development kits the customer can use to get the most out of the processor. Those kits work with Intel and AMD multicore chips as well, although Richards says a user won’t see the same level of improvement they would using Cell processors.

“We knew multicore was a major inflection point in the industry,” Richards told me. “Everybody realized this and the company that addresses the [ease of programming] for this technology will win.” In some ways it’s not only about making it easy, it’s about attracting the hearts and minds of developers to a certain way of coding. That’s why IBM is offering SDKs to students who want to write parallel code on their PlayStations and Intel is pushing an undergraduate curriculum for parallel programming. This is a hardware battle fought using software.

image courtesy of DreamWorks

Solarflare Communications, a chip startup in Irvine, Calif., has raised $26 million in a third round of funding. That brings the total the company’s raised to $126 million, which is a lot of money for a chip startup, even when you consider that the amount includes money raised by Level 5 Networks, which Solarflare acquired in April 2006. But the startup is hoping to use that money to attack a big problem in the data center at prices lower than the current technology offers. And if it succeeds, it’ll make computing faster and data center operations more flexible.

Like many other communications chip companies, Solarflare is working on a way to deliver 10 Gigabit Ethernet over copper, which is cheaper than delivering it via fiber. That enables the high-speed transport technology to move outside of the telecommunications networks, where companies such as Infinera are already pursuing 100 Gigabit Ethernet over fiber, and into mass adoption in the data center. Getting the technology into servers at a reasonable cost would create a market 10 times bigger than that of networking switches.

Others chasing mass adoption of 10 GigE on the server side are Intel and Broadcom, which like Solarflare, have controller chips. Broadcom and Solarflare also have PHY chips sampling with customers. Solarflare CEO Russell Stern plans to integrate the PHY with the controller chip in 2009, beating Broadcom to the market. He will use some of the funding for that purpose.

It’s likely Broadcom will end up attempting an integrated 10 GigE over copper chip as well. Broadcom doesn’t talk about its chips until they’re sampling, but the company did make a mint by cornering the market for integrated 1 Gigabit Ethernet chips for servers. However, success for Solarflare or Broadcom is probably three years out and depends on creating an energy-efficient chip at the 32 nanometer process node, according to Bob Wheeler, an analyst at The Linley Group.

Power consumption is a big challenge for these chips because unless it’s managed properly, they run too hot for servers and switches. And because technology doesn’t stand still in the data center, where virtualization and ever-increasing amounts of data are screaming for fatter pipes, hybrid forms of networking technologies that mix fiber or Fibre Channel with Ethernet are emerging to bridge the Gigabit gap between servers and networking equipment. Broadcom has several products that take advantage of such a hybrid networking environment. Startups such as Arastra and Woven Systems are also in that sector, and may see gains at the expense of a unified 10GigE world, which means Solarflare’s market opportunity could fragment if cheap, integrated 10 GigE takes too long.

If this story interests you then you should definitely check out our upcoming conference, Structure 08.

Nvidia and AMD today each launched two graphics chips for the PC market — but the two companies are pursuing divergent strategies. Both share a recent focus on high-end graphics, which underlines how important visual computing has become; but the different approaches taken by each firm may cost Nvidia market share if its monolithic high-end chips can’t deliver the graphic punch to compete with a multi-GPU strategy embraced by AMD and Intel.

Nvidia launched its GTX 280 and GTX 260 chips, which are larger multi-core processors on a single chip. AMD on the other hand, has taken a bottoms-up approach with smaller, multi-core chips that can be harnessed to a second graphics processing chip on a board to deliver higher-level performance. Lower-end PCs can rely on one AMD processor and those needing more power can turn to two AMD chips or Nvidia’s single, high-power chip.

The real question is how the graphics will look on the screen. And, as in most chip releases, the proof will be a while in coming. Nvidia already has HP signed up to use its new chip in a new Voodoo desktop especially for gaming. That makes sense. Nividia’s chip will rock the high-end application, while AMD’s is designed to provide compelling imagery for cheaper, power-efficient PCs and laptops at a large scale. The real battle will be whether AMD’s dual-chip strategy takes business away from Nvidia for specialty graphics computers and high-performance technical computing. If that occurs, Nvidia will have to be on guard: Intel’s planning to follow the same dual-chip path with its Larrabee GPUs.

AMD’s Sisyphean task of grabbing market share from Intel begins anew with the launch of its latest line of laptop chips laptop platform formerly code-named Puma. Today, AMD launched a refresh of its Turion mobile processor combined with an integrated ATI graphics processor, designed for mobile use form the ground up. AMD also announced it would provide a discrete graphics processor that could work in conjunction with the integrated graphics processor to boost performance.

Puma will both help AMD compete with Intel again in the still growing laptop market and justify the company’s $5.4 billion acquisition of ATI Technologies back in 2006. As graphics become more important to the PC user, both Intel and AMD are shoring up their expertise in that department. AMD bought ATI, while Intel is pushing its own platform strategy with in-house graphics processing.

The Puma platform will launch in laptops from Toshiba, NEC, HP, Asus and Acer. Lucky for AMD, Intel’s planned upgrade to its Santa Rosa laptop platform — the Monetevina platform — has been delayed until July, giving AMD a few-month head start on wowing consumers and the back-to-school buyers.

No one knows exactly how big the market for mobile Internet devices will be, but the major chip makers are betting it will be huge (it’s one of the reasons they’re making chips for mobile devices at 45 nanometers.) We’ve covered efforts by Intel, Qualcomm, and Via Technologies to get their chips into devices sized somewhere between a smartphone and a PC, but Texas Instruments wants to play, too.

TI formalized its MID effort, based on its own OMAP architecture, last month. It’s entering this market with its third generation of OMAP multimedia processors, which were designed four years ago specifically to fit into smartphones. The second-generation chips are currently in the Nokia 800 and 770; the third-generation chips that underlie the formal MID group will be in an undisclosed number of products by the end of the year.

TI’s chips will compete directly with Qualcomm’s Snapdragon chipset and Intel’s Atom chips. Comparatively speaking, TI’s chips show a greater flexibility for the end products. The power-sipping (at 500 mW-750 mW) 800 GHz MHz processor is slower than both Qualcomm’s and Intel’s efforts and requires less power than Intel’s Atom processors, which can require up to 2.4 watts. Ramesh Iyer, a MID product strategy manager with TI, says the lower clock speed is a conscious decision to reduce the power consumption; combining several types of cores with TI software allows for a higher utilization of existing megahertz, he notes.

As products containing chips from competing vendors hit the market, my hunch is that TI’s might be the best when it comes to general purpose use and battery power, followed by Qualcomm’s Snapdragon, which will also be battery-friendly and perhaps perform better than TI’s in general purpose use. Device specs for MIDs based on Intel’s Atom processor are larger, but the x86 architecture might win converts because it’s familiar and plenty of applications are designed for it. And that raises the very legit question of what role the operating system will play in how MIDs are used. I’ll get back to that in a few posts.