Tuesday, November 20, 2007

Exploration of the Business Space

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In the parallel evolution of AMD and Intel, the advantages of Intel's economies of scale express in several ways that are not very obvious. This post will explain one of those forms that I didn't fully take into account when I was bullish on AMD, and from this principle I extract an important lesson regarding investment in the stock market.

How was it that Intel regained the absolute leadership of the processor market? At the heyday of the Netburst architecture, and with the company absolutely committed to its development, Intel still gave the P6 architecture chances to develop. Not only that, but the company also persevered at the Itanium while quietly it kept developing the strategic plan B of Yamhill, what eventually was christened 'EM64T', the AMD64 clone. So, while officially the future of Intel was the Itanium architecture, and the Netburst architecture represented the required transition; the company still kept going forward with architectures that were their antithesis: the AMD64 ISA capable Netburst and what is much more remarkable, to insist in the apparently exhausted P6 architecture [full line here].

At times I thought that it was a gigantic waste of resources to expend R&D on so many dead ends. I mean, after I studied the Itanium architecture it became clear to me that the thing was going nowhere [ too complicated to implement, too disruptive for the industry, and it had too many 'brain damaged' features to exclude the competition ], and I became a fervent supporter of the original Athlons because it was obvious that Netburst was all marketing gigahertz, but although I disagreed with the directions that Intel took, I still thought they knew what they were doing, that is, I thought that Intel could somehow force the market to become a monopoly of very inferior products the way Microsoft forced the Operating System market to turn into the monopoly of the worst Operating System of its time.

By contrast, AMD's plans seemed crystal clear, and sound: To concentrate 100% energies into an evolutionary approach (AMD64), to capture the best features of the architectural propositions of the time, like the Point to Point interprocessor communication that implied integrated memory controller, SOI versus plain ole' bulk silicon, and so on. That is, I though that although Intel had several times the R&D budget of AMD, since Intel was so wasteful and AMD so focused, the underdog had plenty of chances to topple Intel from its leadership position for good.

But needless to say, I was wrong, and paid a dearly high price for it. My mistake was to overlook that the competitive situation between these two companies is so complex that it was justified to expend R&D money in several contradicting approaches, no matter how improbable their success may seem. I should have known better, because I have worked too much in the field of Artificial Intelligence, thus, of all people, I should've realized that Intel was conducting extremely valuable "search" (exploration) of its business space. That the more contradictory the approaches it followed, the higher the assurance of ultimate success. And sure enough, although they grossly miscalculated their priorities assigning them to Itanium and Netburst (and in that order!), the 'Plan Bs' of Yamhill (EM64T) and P6 saved their skin and allowed them to ultimately restore their leadership and monopoly.

On the other hand, AMD enjoyed immense success at focusing at the right things and following the sound design principles embodied in K7 and K8. It seemed as if the success was going to break Intel's monopoly for good, and anticipating that, I vested my money aggressively into that thesis, and lost acutely.

Now, again, why did I lose?
I explained that I always understood what a great challenge (the triple challenge of "Does AMD...") it was the single die quadcore, and that naïvely I thought that AMD's management knew what they were doing, I couldn't conceive that AMD's management could be so irresponsible as to gamble the company at this huge undertaking if they didn't have guarantees of success. Then, it was clear that they didn't have any guarantees, as a matter of fact, no reason whatsoever to suppose the single die quadcore/new process/new architecture challenge was going to be successful, but it was too late already, two thirds of my money had gone.

Did I have any chance of being right, though?
Not really. I should have followed my convictions to their conclusions. Not only the single die quadcore represented a huge challenge, it was a totally unnecessary one too, and again, I thought that AMD's management knew better than me:

I knew in 2005 that the market will not require full quadcore performance as early as 2007, not even 2009; the reason is very easy to grasp for a seasoned software engineer: The combinatorial complexity of multithreading software. To do software that makes effective use of two threads is more than twice as hard than single threaded, to do software that makes effective use of four threads, is more than 10 times harder than two threads, no exaggeration. I knew that the cores will be severely underutilized in the vast majority of applications, in the vast majority of the market. Since the market won't need full quadcore performance, the logical conclusion was to bet on practical approaches to the quad core issue, that is, multi chip processors. Either double duals, like Intel's, or four cores in a die and a large shared cache at an adjoining die. I also knew that the K8 architecture as it was had bandwidth a plenty and short enough latencies for quadcore processors in Master/Slave configuration of dual core dice. Then, the approach of the single die quadcores wasn't called for at all and that should have been more than enough to erode my confidence in AMD's plans.

But that is not all. Although very late, I saw that AMD was in denial of the threat of Conroe. Even though I heard Henri Richard to speak with deference about Conroe, that somehow AMD's management had internalized that the product was very threatening, that didn't express into any change of plans. AMD went ahead with all sorts of plans that assumed massive market share gains, including negotiating the New York fab, to consolidate flex capacity through Chartered, and to acquire ATI (that wouldn't have made sense if AMD would not be able to compensate lost ATI Intel-based business with extra AMD-based), so, the company greatly overstretched its resources anticipating a great demand that never came; but more than that, it was the absence of a contingency plan, AMD's management never cared to tell us, the people who care and supported the company, what it was going to do if Conroe turned out as good as it seemed; Management only spoke on dismissive terms about the threat. Improvement-less AM2 should have been another late warning.

While it is still a mystery for me why the company went the perilous single die quadcore route for no good reason, we can all be sure that it greatly contributed to the catastrophe the inflexibility of AMD's plans. And this inflexibility is inherent to the scarcity of resources to try experiments, business experiments, to explore the business space. Once AMD chose an strategy, there was nothing else to do but a prayer and to work as hard as possible to make it succeed, mid-term revisions were pointless. If you know that AMD is in "projectile" trajectory, that once it fires all is inertial flight, as I knew it was in April 2006, it was possible to determine whether it has reached a top or not -- it had, because the improvements of the K8 had become smaller and smaller until non-existent. Today, you may readily appreciate that AMD is in free falling, 'cos it fired the K10 and the shot fizzled, from here on, it is nothing but accelerating decline.

I have been referring several times to the discrepancy between my opinions that derived from fundamentals and the strategies decided by the management of both Intel and AMD; You may be wondering how to determine what is the superior analysis, because that is key for successful speculation, and here is how: Decide for the thesis of the most informed.

If you have enough knowledge to reach a conclusion from pure fundamentals, such as "Itanium is not possible to implement satisfactorily", "Single die quadcores are not necessary", then, in the absence of concrete evidence that contradicts conclusions from fundamentals, follow your instincts. I find it fascinating that a pedestrian may understand certain key issues of multi billion companies better than their managers, but it happens all the time. The reason is that there is a disconnect between management and reality. While from the point of view of software engineer you are seeing the real stuff, the real value of an architecture, the CEO, despite all of his privileged information, is not seeing the real thing, but third or fourth level interpretations (the opinion on the opinion on the opinion of someone about something) , and there may be interests to distort his information.

On the other hand, if it is something like "I think the P6 architecture is exhausted, that it is impossible to substantially increase its performance", but at the same time a huge organization like Intel does a 180 degree turn to commit to a P6 derivative architecture developed by a group of people out of the power rings of the organization, you can be sure that their architecture is so fucking good that its objective merits prevailed over the intense politicking of a big organization, that is, your opinion is wrong.

A closer example: When a national investment company throws 600 M$ to AMD when you think the company is doomed, who is right, the Arabs or you?: Answer: Think about "what do the Arabs know about the semiconductor industry?", "are they in the centers of power that decide stock prices, media spin?", and also: "Has this organization explored the semiconductor business?" if you get to the conclusion that it is not likely that such organization has privileged information, you may be right. It would be much better if you also had a model to explain why the organization put the money in AMD.

Sometimes it is a much tougher call. For instance, "will Microsoft succeed at DRM?" I meant whether Microsoft will succeed at becoming the de-facto multimedia distribution channel by temporarily jeopardizing the Operating System monopoly with DRM restrictions that allienate the customers. Microsoft is a company that routinely fails at home-grown initiatives, despite following many different routes or covering all the bases. This is evidence that although Microsoft thoroughly explores its business space, its "business cartography" doesn't make its way to management all the time. Why would that happen? If you watch the "developers" video of Steven Ballmer, you get a hint. And Bill Gates quotations about the internet are a famous example of business myopia -- This could be a problem of management personalities that do not allow information that contradicts them to flow. Looking even closer into Microsoft successes, such as the Internet Explorer in the browser wars, you may see that sometimes, when Microsoft is actually threatened, it does the right things; perhaps only when management is willing to admit being wrong, the company may capitalize its thorough knowledge of its business. The problem is that from the outside it is nearly impossible to know if the company is using the business cartography or not.

Apple Computer is another example: I may have the opinion that Mac OS X should be licensed to run in non-Apple personal computers, but I must be wrong: Steven Jobs surely has much better information about this topic, Mr. Jobs has demonstrated that he learned the lessons of his long penitence after being fired from Apple and losing an arm and a leg in NeXT, and Apple continually demonstrates how well it understand its business space. Thus, I have to keep studying Apple to improve my model of that company.

Going back to AMD and its management, it is clear that those guys don't have a clue about their business space. Once they got out of their traditional "value proposition" space, they made blunder after blunder:

  1. Never capitalized on the enormous significance of AMD64 by continuing to partner with Linux to force Microsoft into promotion of AMD64 for all segments, beginning with mobiles [ what did it take to finance the development of Linux drivers for the few wireless chipsets that ran on AMD-based laptops? AMD could have become the "centrino" of Linux, and this would have induced multiple effects that would have turned AMD64 into premiums ]; this because AMD never knew how to behave like an industry leader when it had the undisputed leadership.
  2. It tried to create the consumer market for coprocessors only too late and too timidly, while having had years upon years of all the elements for coprocessing in place.
  3. It didn't capitalize on the desperate need that platform partners had to support AMD (because Intel is treacherous and tries all sorts of nasty tricks to block competition to get into its platform business). Contrary to all rationality, they went ahead and became the direct competitor of its second best partner (nVidia) and destroyed half the business of its fourth best partner, ATI. I think here that AMD's management were not ready for the big leagues. They were scammed by Wall Street into a disastrous acquisition the way hustlers scam the farm boys when they go to the big city
  4. It showed that they were ignorant of how to deal with big OEMs because in periods of high demand for their products, rather than making lots of profits, the preference to OEMs expressed into the destruction of loyal, historical and natural channel business and losses!, then, they fell in the trap of overproduction instigated by the OEMs to have cheaper products.
  5. Having gambled the company with the "triple challenge".
Business Space Exploration has a cost and an expected benefit. The cost does not increase with company size, the benefit gets multiplied by company size: It is a much better option for large companies than it is for small companies, another form of economies of scale. For a company as small as AMD, and being so expensive to explore the market with several architectures, it is not cost-effective for AMD to explore its business space. But this doesn't mean that small companies don't have a chance: On the contrary, they should have the advantage of having their management closer to reality, that is, a better chance to succeed following best principles. When you see a small company like AMD straying from the best principles (such as going the route of the triple challenge), "short" the stock, statistically you will succeed.

P6 Line:
Pentium Pro, Pentium II - Klamath, Deschutes, Tonga, Dixon, Xeon Drake, Pentium III - Katmai, Coppermine, Tualatin, Xeon - Tanner, Cascades, Pentium M - Banias, Dothan, Yonah/Xeon Sossaman, 'Core' - Conroe, Allendale, Kentsfield, Woodcrest, Clovertown, Tigerton, Harpertown, Merom, Penryn, Yorkfield