The chip maker will compete with Intel in a new gadget category.

January 3, 2005

At the world’s largest consumer electronics show this week in Las Vegas, Advanced Micro Devices will beam with pride as it shows off portable media players (PMPs) containing its low-powered Alchemy chips.

AMD, the world’s second-largest PC chip maker, is branching into a new electronics gadget market that is still in its infancy. It’s making bold claims that its entry into the portable media player market will drive down the device’s retail cost and help popularize it, even though arch rival Intel is already selling chips to PMP makers Samsung, iRiver, and Creative Labs. “We have a strong opportunity to lead in the market,” said Dan Shine, director of AMD’s Personal Connectivity Solutions Group.

The PMP seems a natural extension of the popular iPod and MP3 player because it allows consumers to play videos and music and store photos. The device began showing up in stores in mid-2003 but was not an instant hit. Microsoft gave it a big marketing push in the fall of 2004 when several manufacturers started shipping PMPs using the software giant’s Portable Media Center. An example of a PMP: Samsung’s YH-999 is 3.82 inches by 4.21 inches by 0.83 inches and can store up to 80 hours of videos and 5,000 songs. It retails for about $400 to $500.

AMD, which made $3.5 billion in revenue in 2003, is eager to expand its reach in the consumer gadget business. The Sunnyvale, California, company is partnering with First International Computer, a motherboard maker, to produce the shape and size of the portable media player. AMD is also working with Implicit Networks in to create content manager software that will run on Linux or WindowsCE operating systems. The result, after the electronics manufacturers assemble the product, is a PMP that can receive media content directly from a personal video recorder instead of going through a PC. The company has said it’s negotiating with about twelve PMP manufacturers, and has so far named GoVideo in Scottsdale, Arizona, as its first customer. GoVideo says its PMP will hit the shelves in the second quarter of 2005.

Skipping the use of a PC is touted as a big improvement by AMD. Many existing PMPs run on Microsoft’s Media Center software and require their owners to store videos and music files on their computers before transferring the content to their portable players. Those same PMPs also carry Intel chips.

An Intel spokeswoman said the company won’t comment on AMD’s plan, but she added that AMD’s entry “is a sign that this segment is gaining momentum.”

AMD claims that its presence in the market will reduce the production cost of the PMP manufacturers, who will pass along the savings to consumers. Yet the chip maker wouldn’t say by how much. At $400 to $600, a media player is currently out of reach of the masses.

Even with a lower retail cost, the device is not a sure success. Analysts question whether the PMPs offer enough features to entice consumers, who already can see movies on the larger screen of a laptop computer and listen to music on the iPod. The sources for content are limited to TV shows, free or pre-paid videos from the Internet, or personal recorders – consumers won`t be able to transfer commercial DVD content to their PMPs. And many of the PMPs simply look clunky. “There is not enough video content to justify the gadget,” said analyst Josh Martin at market research firm IDC. “Mostly the price has to drop. Or else you ask yourself, ‘What am I trading off?’”

But don’t write off the gadget as a dud yet, said Mr. Martin. Since the market is new, there is room for improvement and growth. IDC reported that in 2003, manufacturers shipped 102,350 PMPs to the global market, with nearly 77,000 of them to the United States. In 2004, about 290,570 units were shipped worldwide and 190,170 to the U.S. By 2008, IDC sees nearly 4.6 million PMPs leaving the factories worldwide, with 2.7 million of them going to the U.S. Mr. Martin cautioned that the 2008 projections are expected to change because the features now offered by PMPs will likely be integrated into other consumer devices.

For AMD, picking the Alchemy chip (Au1200) for the device is a good idea. AMD hasn’t put the processor to a whole lot of use since it bought the chip’s original designer, Alchemy Semiconductor, in 2002, said analyst Tom Starnes with tech research firm Gartner. “I am happy and impressed that AMD will do something with Alchemy, which is a great chip,” he said. The various versions of Alchemy are found in products such as Motorola’s Media Station and i3 Micro’s IP-TV set-top box.

Still, Mr. Starnes has doubts about AMD’s plan for the Alchemy. He is not convinced that consumers will fall in love with the PMP like they have with the iPod. “I don’t think you will see AMD’s stock price go up $3 because of it,” said Mr. Starnes. “There is no slam dunk here at all.”