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Advanced Micro Devices, Inc. (AMD), Sony Corporation (ADR) (SNE): Did This Chipmaker Bet on the Wrong Horse?

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Following a series of big quarterly losses driven by long-term weakness in the PC market, Advanced Micro Devices, Inc. (NYSE:AMD) CEO Rory Read decided to implement a new strategy. AMD’s turnaround plan involves not only cutting costs, but also reducing Advanced Micro Devices, Inc. (NYSE:AMD)’s reliance on the PC market by diversifying into adjacent markets.

Advanced Micro Devices, Inc. (NYSE:AMD)

Of particular interest to Advanced Micro Devices, Inc. (NYSE:AMD) are the “embedded” and “semi-custom” chip markets, because it expects those markets to continue growing (offsetting declines in the PC market), and a single design win can lead to a long revenue stream. Advanced Micro Devices, Inc. (NYSE:AMD) hopes to eventually derive 40% to 50% of its revenue from embedded and semi-custom chips. One of the biggest early targets for AMD in this respect was the game console market. Indeed, AMD won the designs for all three next-generation game consoles: Nintendo’s Wii U, Sony Corporation (ADR) (NYSE:SNE)‘s PlayStation 4, and Microsoft Corporation (NASDAQ:MSFT)‘s Xbox One.

Even Advanced Micro Devices, Inc. (NYSE:AMD) bears have praised the company for its success in the game console market. However, I am skeptical that this will prove to be a growth market as AMD anticipates. While the outgoing generation of game consoles sold more than 250 million units combined, a growing trend toward mobile and cloud-based gaming could mean that the game console market is ripe for disruption. In other words, AMD may have bet on the wrong horse.

Consumer unrest rising?
Nintendo was the first company to bring a new console to market for this generation, releasing its Wii U console last year. Sales fell flat, totaling just 3.45 million units in the first two quarters after launch. Slow console sales have led to weak developer support, which could make it even harder to boost sales going forward.

Still, Advanced Micro Devices, Inc. (NYSE:AMD) bulls and game console fans had high hopes for Sony Corporation (ADR) (NYSE:SNE)’s PlayStation 4, which was revealed back in February, and Microsoft’s new Xbox console, which was unveiled just last month. AMD stated on its Q1 earnings call in April that Nintendo, Microsoft Corporation (NASDAQ:MSFT), and Sony Corporation (ADR) (NYSE:SNE) were likely to ship more than 40 million game consoles combined in 2013, with that number expected to grow going forward.

However, rather than creating a wave of enthusiasm, Microsoft Corporation (NASDAQ:MSFT)’s Xbox One launch spawned protests among gaming enthusiasts who are worried about the use of digital rights management technology on Xbox One games. The games will need to be activated online, which would make it harder to trade games with friends and would give Microsoft Corporation (NASDAQ:MSFT) and game publishers control of the massive used games market. Gamers are also worried about the possibility that PlayStation 4 will include some type of DRM, as details on PS4 have been very spotty so far.

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