Why Won't Advanced Micro Devices Inc. Expand Into Chromebooks?

By Markets Fool.com

AMD 's cheap x86 microprocessors seem like a natural match for Chromebooks, the low-end laptops tethered to Google's cloud-based ecosystem.

Continue Reading Below

Yet AMD isn't interested in developing chips for Chromebooks, according to CTO Mark Papermaster, who called Chromebooks a "rock-bottom" market at the ISSCC conference in February. Is shunning Chromebooks that the right strategy for AMD, or is it missing out on a lucrative growth market?

Chromebooks. Source: Google

The business of Chromebooks
IDC estimates that Global sales of Chromebooks roughly doubled to 4.6 million shipments in 2014, but only accounted for 1.5% of the PC market.

However, Gartner believes that annual Chromebook sales will soar to 14.2 million units by 2017, accounting for 4.3% of the PC market. By comparison, Gartner expects annual shipments of all PCs, including Chromebooks, to only rise 4.3% to 327.3 million units between 2014 and 2017. Based on those numbers, establishing a toehold in Chromebooks might help AMD offset sluggish PC sales.

Continue Reading Below

Intel's Celeron chips power roughly three-fourths of all Chromebooks, according to Mercury Research analyst Dean McCarron. The remainder runs on ARM licensed designs. This duopoly means that AMD would need to undercut both Intel and ARM licensees to enter the Chromebook market -- which could be rough on margins.

Are AMD's chips too powerful?
The problem with Chromebooks is that they're designed for light usage, such as Web browsing, office work, and video streaming. These tasks don't require a lot of graphical horsepower.

AMD, which acquired graphics card maker ATI in 2006, specializes in APUs which combine the CPU's processing power with the GPU's graphical muscle. Carrizo, its upcoming notebook SoC, pairs four x86 CPU cores with eight GPU cores -- which is arguably more power than any Chrome OS user would ever need.

Yet AMD's Mullins, the low-power APU that it introduced last year, seems like a good fit for Chromebooks. The chip, originally intended for tablets, was installed incheap Windows laptops like Hewlett-Packard's$230 Stream 14 last year.

Why margins matter
It seems odd that AMD didn't pit Mullins against the Celeron in the Chromebook market, but the margins, as Papermaster suggested, probably aren't worth the effort.

AMD is still on the path set by former CEO Rory Read, who shifted the company toward higher-margin businesses, like the embedded, server, and semicustom unit, which sells SoCs for Sony's PS4 and Microsoft's Xbox One. That strategy helped AMD grow its top line, reduce operating expenses, and narrow its non-GAAP losses.

Part of that strategy, which current CEO Lisa Su is continuing, is to avoid head-on battles against Intel. Intel has much more cash to spend on marketing, and isn't shy about taking losses to gain or retain market share. For example, Intel's mobile unit posted an operating loss of $4.2 billiondue to its aggressive subsidization of tablet and smartphone makers. With Chromebooks, Intel sells low-margin Celerons to prevent ARM licensees from gaining ground in the PC market.

Will the Chromebook Pixel change AMD's mind?
Chromebooks don't require much GPU power, but future models might. Last month, Google unveiled the second-generation Chromebook Pixel, a high-end Chromebook that starts at $999. The device sports a 2.6 Ghz dual-core Intel Core i7 processor, 16GB of RAM, and 64GB of storage. For graphics, the Pixel uses Intel HD Graphics 5500, an integrated graphics card which can play most modern PC games on low graphics settings.

The new Chromebook Pixel. Source: Google

There's not much of a market now for the Pixel, since Chrome apps don't demand much CPU or GPU performance. However, Googleis making select Android apps compatible with Chrome OS, which means that graphically demanding Android games could be natively played on Chromebooks soon. That cross-platform compatibility might encourage other OEMs to manufacture high-end Chromebooks with beefier GPUs, which would be a more favorable market for Carrizo.

The bottom line
AMD's distaste for the Chromebook market makes sense, because it doesn't want to ruin its margins competing against Intel and ARM in a "rock bottom" market. But if the Chromebook market continues growing and evolves toward higher-end devices like the Pixel, an opportunity for APUs like Carrizo might emerge.

The article Why Won't Advanced Micro Devices Inc. Expand Into Chromebooks? originally appeared on Fool.com.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Gartner, Google (A shares), Google (C shares), and Intel. The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.