Dell deal could hurt AMD's margins

What I mean by that is, if you are production limited, you skew production toward higher margin products, make less Sempr0ns, more Opterons. With vendors though, this is a thornier problem, and you have a lot less flexibility.

We are told the Dell/AMD contract has hard CPU targets of over 10 million, and I don't know if there are any other such contracts out there. Let's assume there are some with specific numbers and others with far more open-ended options. This means AMD has to deliver to some people, and less so to others. The technical term for those in the 'other' category is 'shafted', but some call it allocation.

There is nothing wrong with this, mind you. If you sign a contract that forces X CPUs to be delivered, you will get X. If you happen to need fewer, you still get X, and you suck it down. It is not a risk-free proposition, and those that don't sign hard contracts know this, and risk 'allocation' instead of a warehouse full of depreciating CPUs.

The problem as I see it is that Dell is taking a large percentage of the AMD production at razor-thin margins from AMD. To supply these numbers, AMD is having to cut the lower-volume players who don't buy as many, but do so at higher margins. In aggregate, in capacity-limited production times, a CPU sold to Dell is a CPU not sold at a higher margin to Joe's Computer and Bait Supply.

By all outward appearances, AMD is selling every CPU it can make and then some. This is a good thing, but you have to consider that without Dell, or with less Dell, would it be making a lot more money? Without hard numbers we may never know, but the quarter end conference call will most likely give us some pretty big hints. µ