Is A Benevolent Duopoly about to End?

The NYT reports that Advanced Micro Devices plans major cuts in hiring after a surprise revenue forecast more than $400 million below it's own January numbers. This crisis is potentially life-threatening for AMD because of its cutthroat competition with much larger rival Intel.

Consumers have been the big winners over the last few years as both Intel and AMD have suffered shrinking profit margins and simultaneously increased the pace of innovation. But the semiconductor market could easily be one of a handful of markets that is most efficiently served by a monopoly. The problem with semiconductors is that the cutting edge facilities required to manufacture computer chips in the quantities necessary for the mass consumer market seem to have grown unbelievably expensive. In ten years, it might cost $10 billion for just one fabrication facility that in 1990 might have cost only $100 million. This incredible change in the order of magnitude of costs means that only a handful of companies worldwide can afford to build these facilities. If costs continue to rise, it may only be efficient for one company to invest in these massive undertakings.

The consumer electronics world is much richer because of the competition between Intel and AMD. It is always possible that AMD's planned chip code-named "Barcelona" will be a sufficient challenger to beat back Intel's current champ the "Core 2 Duo". But Intel already has two successor chips of its own lined up and AMD's cost-cutting won't help it keep up with the intellectual arms race.

Before AMD, Intel turned out improved products more infrequently and charged higher prices. If Intel succeeds in driving AMD out of competition for microchips, all consumers will be at least slightly worse off.