The chip giant settled with AMD. But another rival is making noise about anticompetitive behavior.

Nvidia's Huang is gunning for Intel. Photo: Nvidia

You’d think Nvidia CEO Jen-Hsun Huang would be happy.

After bumping along as low as $7 a share at the beginning of the year his stock is up near $14. Several months ago Apple (AAPL) began using his graphics chipset – a group of circuits designed to work together – across nearly its entire line of Macs, giving him a very high-profile endorsement. And in the white-hot netbook segment, his Ion processors have won raves for turning underpowered laptops into HD video machines.

Problem is, both of these acclaimed Nvidia (NVDA) products might be dead in the water.

Why? Huang blames chip giant Intel (INTC). Nvidia’s graphics chipsets, which Steve Jobs liked enough to buy by the boatload, aren’t allowed to work with Intel’s latest offering, code-named “Nehalem” – and in the computer world no Intel compatibility means no mainstream future. Nvidia’s Ion chip is designed to work alongside the chip giant’s Atom processor, but lately it’s been priced out of the market by – you guessed it – Intel.

Feeling AMD's pain

All of this has piqued the interest of the Federal Trade Commission, which is looking into whether Intel has improperly used its power in the computer chip market to choke rivals. For those who are handicapping the chances that the FTC will bring charges, Nvidia’s gripes have recently taken on new importance: Advanced Micro Devices (AMD), which had been Intel’s main critic, recently settled its antitrust complaints with Intel for a tidy sum of $1.25 billion. That leaves Nvidia to bang the anti-Intel drum.

“I’m sympathetic to what AMD had to go through over the years,” Huang says.

Intel says it’s a tough but fair competitor, and that Nvidia has caused its own problems. To wit: The two companies signed a limited patent-sharing deal five years ago, and Intel says that if Nvidia had read the fine print, it would have noticed that designs like the current Nehalem chips weren’t covered in the agreement. And the Ion dispute? Well, Intel says it just lowered prices on its Atom chipsets to stay competitive. What’s wrong with that?

Nvidia tells a different story. Executives there say they’re a victim of the same kinds of tactics that got Intel into antitrust trouble in Europe and Asia. Nvidia believes it should be authorized to make Nehalem-compatible chipsets under the 2004 agreement; it claims Intel is just getting litigious to stop a competitive threat. And with Ion, Nvidia accuses Intel of unfair pricing that locks it out of the market. Intel says Nvidia just doesn’t understand the incentives it offers customers.

(The two companies are battling in court over the chipset agreement. Intel has asked a Delaware court to clarify whether Nvidia has the right to build Nehalem chipsets, and Nvidia has countersued for breach of contract.)

The courts will ultimately decide who’s right – that is, unless Intel decides to ink a settlement with Nvidia, too. Even then, that probably won’t be the end of Intel’s legal headaches. Maybe that’s the trouble with being a giant. There’s always some kid with a slingshot gunning for you.

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The state of the state? "A train wreck," says one official.

If the world’s eighth-largest economy were a member of the proper religious order, it’d be time to call in a priest to administer last rites.

Name almost any serious malady and the state of California has it: the nation’s highest marginal tax rate coupled with an abysmal public education system; the most home foreclosures; a free-falling commercial real estate sector; lame-duck governor with no legislative support and a disdain for an annual budget process that he refers to as kabuki theater; unemployment somewhere between the official number of 12% and the whisper number of 18%; a 20% drop in year-over-year revenue; municipalities that have either declared bankruptcy (Vallejo) or are on the verge (Los Angeles); and a black-box permitting process that scares away business investment even while every week, 3,000 more taxpayers migrate to greener pastures.

Californians may be a can-do lot, but faced with all that evidence and much more, the political and economic leaders who spoke at the Milken Institute’s annual “State of the State” conference held yesterday at the Beverly Hilton could hardly have been more dour. “It’s a train wreck, and it’s getting worse,” said Bill Lockyer, California State Treasurer. Added former Assembly speaker Bob Hertzberg, now co-chair of governance reform group California Forward, “A high-speed train wreck.”

What’s this got to do with technology? Nothing, unless you consider that California is home to the many of the biggest tech companies on the planet (and 51 members of the FORTUNE 500), the bulk of the venture capital industry, many leaders of green-tech, two of the most patent-producing universities in the world in Stanford and UC Berkeley, and top thinkers across all spectra.

“California represents 10% of the population of the United States,” said Eric McAfee, chairman of McAfee Capital and CEO of AE Biofuels. “but probably 50% of innovation.”

Tech into ploughshares?

Ironically, Silicon Valley has built the tools and infrastructure to allow talented people to work anywhere in the world they choose, and as the state circles the drain, the fear is that businesses, entrepreneurs, and students will no longer feel the pull of the Golden State.

From a political and budgetary perspective, California has myriad problems – from Proposition 13 to direct-democracy ballot initiatives to abysmal credit ratings. But the biggest problem may be girth. The state increasingly seems too big not to fail.

“States were never intended to be the size of the entire eastern seaboard,” said Hertzberg. “What is the commonality between the folks in Calexico and Crescent City? This manifests itself in a politboro style of government in Sacramaento.”

None of the speakers–including gubernatorial candidates Gavin Newsom and Steve Poizner–offered a magic bullet, but there was some consensus on where to start.

Many called for an adjustment to the mandate that 2/3 of the legislature must approve a budget or a repeal of term limits that seem to enslave legislatures to special interests.

Others craved less (or more, take your pick) taxes and a lessened (or at least consistent) regulatory structure. Chevron's (CVX) John Watson, who will assume the CEO role in January, said the permit process for an upgrade to the company's Richmond, California, refinery took four years while an Indian company built its own entire refinery in half the time.

Still others offered hope that things will somehow work themselves out–because California has been in the dumps before and that the state will continue to be a magnet for the brightest immigrants.

“The combination of great science and great local universities and venture capital money started not just Genentech in 1976, but an entire industry,” says former Genentech president and current UCSF chancellor Susan Desmond-Hellmann, showing a slide of California tech companies that were either founded by immigrants or where immigrants played key roles in the early days, including Yahoo (YHOO), Sun (JAVA) , eBay (EBAY), Intel (INTC), Google (GOOG), Viewsonic, SanDisk (SNDK), and Nvidia (NVDA). “There’s something special about California: the atmosphere, the diversity, a wish to be curious and ask questions. The secret sauce behind Genentech, the Googles, Yahoos, and Amgens is the combination of entrepreneurial spirit, great universities, and a willingess to marry business and science.”

Desmond-Hellman warned, however, that Genentech has remained a biotech powerhouse because it has never lost sight of where its power comes from. “We always believed that the company would be no better than the people we recruited and we keep," she said. "We never took for granted that people had to work at Genentech. They have choices.”

So do the 3,000 Californians leaving the state every week.

Changes in computing mean software companies need hardware-savvy employees

By Sam Blackman, CEO and co-founder, Elemental Technologies

Blackman: Your next hire might need hardware chops. Photo: Elemental Technologies

Whether we knew it or not, we’ve all been relying on something called “Moore’s Law.”  Back in the 1960s, Intel (INTC)  co-founder Gordon Moore noticed that the number of transistors that could cheaply be placed on an integrated circuit had been doubling every two years.

That meant that central processing units, or CPUs — the chips that drive computer performance — were getting twice as fast in that same time period. That amazing rate of technological change has held up for more than 40 years.

Moore’s Law is why we take it for granted that the cell phone we carry around today is more powerful (and cost us less) than the top-of-the-line desktop computer we bought ten years ago. It is also why we’re not surprised that in less than a decade the Web has changed from a place to look at ugly text pages to a place to watch high-definition TV shows.

But after 40 years, Moore’s Law is slowing down. We’ve finally reached the point where faster processors consume too much power, and manufacturing them to achieve ever-higher frequencies gets to be too expensive. This technological pressure will radically reshape the way we build computers and write software in the years to come.

Going forward, computers will get faster by adding additional processors that work together to solve problems. That’s why we hear more these days about the number of cores in the CPU rather than how fast the processor is in our computer.  Giants like Intel and Nvidia (NVDA) are racing to create new “massively parallel solutions,” composed of as many as 240 individual processors designed to work in concert to solve problems.

Unfortunately, writing software that runs well on massively parallel systems is incredibly difficult.  Engineers need to figure out how to break big problems down into smaller pieces that individual processors can work on at the same time, how to keep all of the individual processors coordinated with each other, and how to assemble all of the work into a useful output.

At the recent Hot Chips microprocessor design conference in Palo Alto, Calif., John Hennessey, the president of Stanford University, called parallel computing “the hardest problem in computer science.”

To date engineers have only solved a small set of problems using parallel systems, and it’s not for lack of trying.  Microsoft (MSFT) and Intel think that figuring out parallel computing is so important that they’ve invested $20 million funding parallel computing research centers at the University of California Berkeley and the University of Illinois at Urbana-Champaign.

Difficult or not, the future of computing is going to be on massively parallel systems. Some savvy companies are already taking advantage of massively parallel systems to trade stocks, search for oil, and offer online video games. At Elemental Technologies, we’re building software to help professionals process video files faster and more economically than ever before.

To build the kind of team that can take advantage of these massively parallel systems, software companies are going to have to rethink the mix of engineers that they are hiring. They will need people with experience in hardware design and low-level “close to the metal” programming. Engineers who understand how these new massively parallel architectures work, and know how to parallelize problems.  Today, programmers with these skills are in seriously short supply.

There’s a pool of great engineers who don’t even realize that their future is working for software companies yet, though. They’re the digital hardware engineers who have spent their career working for chip companies and startups working on things like embedded systems and integrated circuits – where the parallel processing paradigm has been in use for years, since that is the way physical devices work. The smartest software companies will snap up as many of these engineers as soon as possible in the next few years and put them to work building software that can take advantage of the computers of the future.

Companies that don’t harness this resource will find themselves disrupted by faster, cheaper, and smarter software from competitors who did.

Blackman is CEO of Elemental Technologies, a Portland, Ore.-based company that develops massively parallel software to help computers convert video more efficiently.

Computer makers hope that stylish new laptops like Hewlett-Packard's Pavilion dm3 will lure shoppers away from low-cost netbooks. Photo: HP.

There’s going to be a PC retail showdown this holiday season. Let’s call it the netbook vs. the nymph.

In the netbook corner: the cheap, small, underpowered laptops that are all the rage lately. Asian manufacturers like Asus first introduced them, and consumers love them because they handle documents, e-mail, and web surfing for as little as $300. The big PC makers offer their own models, but also secretly hate that netbook fever is sucking the profits out of the industry.

In the nymph corner: a newer class of svelte yet powerful laptops that could steal some attention from netbooks. (The industry calls them “thin and light,” but hey — nymph is more fun.) Like their competition, nymphs are slim — some of them less than an inch thick — and they often eschew extras like DVD drives for the sake of portability. Perhaps best of all, they do a solid job running Microsoft’s eagerly anticipated Windows 7 operating system, which arrives next month.

Today PC heavyweight Hewlett-Packard (HPQ) is the latest to unveil several eye-catching additions to the nymph category, including the Pavilion dm3 at $550 and the Envy 13 at $1700. Both use the latest mobile processors from Intel (INTC) or Advanced Micro Devices (AMD) and deftly handle tasks like 3D gaming and video editing.

What’s at stake here? Just the near-term health of the PC business.

Like most other categories, PCs have had a rough year. Penny-pinching businesses have been slow to spend on technology in a tough economy. Consumers have been shopping mainly for bargains. Meanwhile many global PC makers have cut prices to drum up sales. “The battle for market share is being fought on the price front, which will ultimately hurt the whole industry,” as First Global Research put it in a recent note.

If shoppers continue to bargain shop for netbooks this holiday season — and analysts expect they will — end-of-year growth at companies like HP, Dell (DELL), Intel, and AMD won’t look so hot. For the holiday season, says NPD Group analyst Steve Baker, “unit sales are going to be up big double digit percentages — above teens, I would think. Dollars will be pretty much flat.”

That is, unless the industry can convince consumers to spring for more powerful machines.

Leslie Sobon is trying to do exactly that. Sobon, marketing chief at AMD, has redrawn the sales pitch for computers like HP’s dm3 and Acer’s Aspire 5538, which contain her chips. Rather than emphasize stats like gigahertz, bus speed, dual-core, and the like, the new VISION strategy focuses on telling customers what the PCs can do — an approach that AMD’s research showed is sorely lacking at retail. “We’re focused on entertainment — things like photos, like Blu-ray, Hulu,” she says. “See, share, create.”

Customers are more likely to buy a better-equipped laptop, Sobon’s market research suggests, if they have a clear sense of what they’re getting for the money.

Folks like J.P. Morgan analysts Mark Moskowitz and Anthony Luscri don’t sound too optimistic about how the upsell will go over this year. “With consumers seeming to flock to low-cost netbooks, we do not expect a shift back to standard notebooks to run Windows 7 en masse,” they wrote recently.

Indeed, netbooks are getting more attractive — and more powerful — all the time. Along with the rest of its PC lineup, HP introduced two $400 netbook standouts of its own: the Mini 110 by Studio Tord Boontje, which features a lace-like, three-dimensional look; and the Mini 311, which can handle 1080p high-definition video NVIDIA’s (NVDA) Ion graphics processor.

With products like that hitting the market, there won’t be a huge shift away from netbooks anytime soon — but PC makers will take any upsell they can get.

AMD's chips are often found in low-cost PCs, which means executives can't get a true sense of fourth-quarter sales until after Black Friday. Image: AMD

Based on Intel's dramatic sales warning Wednesday, you might expect rival Advanced Micro Devices to just crawl into a hole and die. If the economic mess is tripping up the most powerful chip company on the planet, how could its underdog challenger stand a chance?

Indeed, investors think that when Intel (INTC) sneezes, AMD (AMD) gets the flu. After Intel predicted fourth quarter sales will come in about $1.5 billion below its previous forecast, AMD shares plunged as much as 9% in midday trading Thursday before a broad market rally sent shares up 5% for the day. Intel shares, by way of comparison, were down only 5% midday and finished up up nearly 7%.

The pessimism about AMD does make some sense. While Intel has more than $12 billion in the bank, 80% share in PC chips, and a recent record of thumping AMD in the marketplace, AMD has been losing money. In a tough environment, you bet on the healthier company.

Or maybe not. Take a closer look at AMD and Intel, and it's not quite that simple.

For starters, there's a good reason why AMD isn't lowering its sales guidance quite yet. Chief Financial Officer Bob Rivet told financial analysts Thursday that rather than echo Intel's warning, he will give an update the week after Thanksgiving.

Why wait? Because of Black Friday, the biggest shopping day of the year. Bargain-hunting consumers are AMD's core audience, while Intel does far better with higher-end consumers and businesses. Holiday buying will surely take a hit this year – a survey from Accenture shows that 40% of U.S. consumers plan to spend less this year than last. But if enough coupon clippers show up on Nov. 28 to buy cheap PCs, AMD could get a boost. Veteran chip analyst Nathan Brookwood of Insight 64 said the poor economy might help AMD gain share.

Of course, AMD-powered bargain PCs still won't be the most eye-catching deal at retail. That honor will go to netbooks, a new breed of lightweight mini-laptops that are good for Web surfing and word processing, and that tend to come with Intel's low-cost Atom processor inside. Though we could easily see netbooks selling for less than $199 this holiday season, AMD is hoping that their limitations will tempt buyers to trade up to a fuller-featured PC. (Don't even think about listening to a CD, watching high-def streaming video, or playing anything more exciting than Solitaire on a netbook. They can't handle it.)

Even with the netbook challenge, AMD has reason for hope. Its stock has been doing so poorly – it's down more than 90% from its high three years ago — that even mediocre sales performance will seem like a huge victory. After its recent layoffs and a planned spinoff of its manufacturing operations, AMD's balance sheet numbers are friendlier: Executives say that if AMD can manage more than $1.5 billion in sales — 15% less than last year — it can claim a profit.

Believe it or not, AMD might pull this off. Its latest graphics chip is taking share from rival Nvidia (NVDA). Its new server chip, code-named Shanghai, is getting positive reviews. If bargain-hunting PC buyers show up even in modest numbers, AMD has a fighting chance. (To make the best of it, AMD chief marketing officer Nigel Dessau tells me he's actually spending more this year to school U.S. and European retail workers on the benefits of AMD technology.)

This is certainly no time for unbridled optimism, and AMD has proven it can fumble even in good times. But it has an extraordinarily low bar to step over. Intel expects fourth quarter sales to come in about 15 percent below last year, and it's a disaster. If AMD turns in roughly the same performance, it will be cause for celebration.

In a surprise announcement, Intel (INTC) said Wednesday that its gloomy fourth quarter forecast wasn't nearly gloomy enough. Instead of pulling in between $10.1 billion and $10.9 billion in sales, the chip giant expects closer to a dreadful $9 billion. The stock tumbled more than 7 percent after hours.

It's hard to articulate just how bad this news is.

When Intel CEO Paul Otellini gave Intel's now obsolete forecast a month ago, it was the fuzziest range the company had ever offered. The global economic crisis, he said, left things so uncertain that he couldn't be more specific than a ballpark estimate. The low end of Intel's old range – the $10.1 billion – would have seen sales during the normally bustling holiday quarter actually shrink compared to the ho-hum quarter before. That's pretty much unheard of.

Well, things just got much worse than that worst-case scenario.

Intel slashed its predicted profit margin by four points. Its prediction of revenue between $8.7 billion and $9.3 billion in the fourth quarter means chip buying has fallen off a cliff, as PC and server makers around the world – folks like Hewlett-Packard (HPQ), Dell (DELL), IBM (IBM) and Apple (AAPL) – scramble to adjust to dramatic slowdowns in business. Intel's warning also bodes ill for folks like Microsoft (MSFT), Cisco (CSCO), Advanced Micro Devices (AMD), Nvidia (NVDA) and Sun Microsystems (JAVA), whose products end up in the hands of many of the same customers.

Perhaps most depressing, things are bad enough that Intel rushed to report the news. Executives had already planned to take the unusual step of giving investors a business update the week after Thanksgiving. By canceling that update and offering this one, Intel is saying things are so obviously grim there's no point in sitting on the news to be sure things won't improve. Christmas isn't coming for the PC and server business this year. Instead of being the best quarter of 2008, Q4 will likely look like a mediocre quarter – from 2007.

The only thing scarier than these terrible numbers? The implications for next year. Sales typically drop from the fourth quarter to the first, as consumers slow down from their yuletide buying binge. But if things are already bad now, what's to say they won't be even worse in January?

All of this puts last week's relatively optimistic comments from Intel senior VP Sean Maloney in a new light. Sure, Intel has plenty of cash – enough to weather even a deep recession. But if the sales outlook continues to look this bad, it won't be long at all before Intel faces enormous pressure to cut costs and salvage earnings per share.

Actually, with numbers this bad from a tech bellwether, it might not be long before everyone in the industry is slashing costs. Merry Christmas.

Despite the downturn, AMD is hopeful that it can sell its higher-performance server chips; and the early reviews are positive. Image: AMD

Sun Microsystems sells a lot of servers to the financial services industry, which has been hard-hit by the credit crunch. So when Sun CEO Jonathan Schwartz recently asked a banking executive how he was doing, he probably wasn't surprised at the response: "I'm curled up in the fetal position."

Investors can relate. Last week Sun (JAVA) warned that it would report a huge loss for the summer quarter, news that sent shares skidding 17%. But despite the doom and gloom, Sun expects to keep getting server orders from banks and other customers. After all, with all those Wall Street traders dumping stocks, somebody's still got to process the transactions. And that's part of the reason why Advanced Micro Devices (AMD) is optimistic that its new server chip, code-named Shanghai, will do well despite the downturn.

Over dinner Monday night at Zibibbo in Palo Alto, Sun Executive Vice President John Fowler predicted that he wouldn't have trouble selling new servers equipped with the updated Opteron processor from fellow underdog AMD. Sun's tests of Shanghai have gone swimmingly, he said, it has already begun shipping, and should appear in products in a few weeks. The new chip is designed to plug into the same equipment that used its predecessor, code-named Barcelona. Since Shanghai won't suck more power than Barcelona and it will be priced to sell, it should be a no-brainer for customers who need to buy now. (Fowler's pro-Shanghai feelings are echoed by several analysts, who say other server makers plan to build it into their products.)

Of course, we've all heard enough of these promises to take them with a grain of salt. After all, last year Barcelona was supposed to be a big hit — but when AMD released the chip later than expected and it ran at slower speeds, enthusiasm dimmed considerably, and some customers defected to Intel (INTC).

The message from AMD and friends continues to be that Barcelona's mistakes cannot – will not – happen again. Sitting across the table from Fowler as he predicted smooth sailing for Shanghai was AMD's Randy Allen, a senior VP who leads the processor business. Allen told me he realizes that AMD needs a trouble-free Shanghai launch, not only to put the ghosts of Barcelona to rest, but also to reassure customers like Sun about designing future products around AMD chips. (AMD's next major chip overhaul that would require such redesigns is due in 2010.)

So what should investors make of all this?

It certainly does appear that things are looking up for AMD. In just the past couple of weeks, the company has reported gains in the graphics business and announced a huge cash infusion from Middle East investors that should allow it to spin off the manufacturing of its chips and keep those operations from dragging so much on earnings. It also restructured its executive lineup recently, installing new CEO Dirk Meyer and bringing in new engineering executives to make sure its chip blueprints work as advertised. After the Barcelona fiasco of 2007, it was clear that 2008 would be a rebuilding year. So far, AMD seems to have made good use of its time.

But the real test will come in 2009. That's when those rebuilding efforts need to translate into sustained profitability and market share gains. In the first quarter, AMD should have a version of Shanghai for desktop computers. In 2009 AMD has also promised a laptop chip that will offer both low power and graphics performance for a price that blows Intel out of the water.

And if all that's on track, we can also reasonably expect to hear more about AMD's plans for ultra-portable devices. Allen confirmed to me that his team is working on a chip that will compete with Intel's tiny, low-power Atom processor — but with a key difference: Intel plans for Atom to eventually make its way into GPS devices and smartphones, while AMD will aim its chips at the low-cost mini-laptops and simple desktops that industry insiders are calling "netbooks" and "nettops."

The biggest driver of profitability for AMD, though, must be servers — and that means these Shanghai promises have to pan out in a tough economy. To gauge whether that's happening, it's a good idea to watch customers like Sun. If their server customers keep buying? Good sign. If more executives wind up in the fetal position? Bad. (NVDA) (MSFT) (D

Nvidia inside: Apple's latest MacBook laptops have an Nvidia graphics processor next to their Intel chips, which puts the spotlight on graphics chips as an important part of today's basic computer system. Image: Apple

With all the presidential campaign talk about American exceptionalism, it might be easy to forget that we do a pretty unexceptional job at some things — like shopping for computers.

No question, we Americans buy a lot of them – the latest estimates say more than 75% of U.S. households have at least one PC, among the highest ownership rates in the world. The problem is, we are hooked on the underpowered, bargain-bin variety, the sort that putter around on the Internet, choke on high-definition video, and struggle to render 3D games. Our habits make PC buyers in places like Germany laugh at us. (The mainstream German PC buyer has a nose for good engineering – no big surprise there.)

What should we Americans be buying that we're not? Something called a graphics processor is high on the list. These special chips made by companies like AMD (AMD) and Nvidia (NVDA) speed up visually intensive (and increasingly popular) tasks such viewing photos and high-definition video, and playing games. According to research firm IDC, last year 39% of consumer PCs worldwide shipped with graphics chips — but both AMD and Nvidia says the United States lags savvy countries in Europe and Asia when it comes to embracing the technology.

That's why when Apple (AAPL) unveiled new MacBook laptops last week, the specs turned a few heads. Unlike the other mainstream PC makers, Apple has chosen to stop using the standard-issue integrated graphics that come packaged with Intel (INTC) chips, and switch to a new setup from Nvidia, which Apple says can run about five times faster. Apple will continue to source the main laptop processors from Intel, but those Intel processors will now work in tandem with a respectable graphics chip, part of Nvidia's GeForce 9400M chipset.

It's not that graphics chips are new – add-on, or "discrete" graphics chips have around for a long time. What's new here is that these Nvidia graphics are built into the basic chipset. So mainstream Mac users will get the benefit of improved visual performance without having to pony up for a separate chip. It's an acknowledgment that these chips can lead to a better experience for everyone, not just gamers and video geeks. (And Nvidia managed to keep this chip from being a heat-making power guzzler; otherwise, it never would have fit into the svelte MacBook Air.)

Could this endorsement from tech's hottest company finally put graphics processors on the map for the mainstream? The folks at Nvidia certainly hope so. The day after Apple's announcement, I caught up with Drew Henry, general manager of Nvidia's media communications processor business unit, and he was practically gushing.

"I think this is the beginning of the era of visual computing," he said. "I believe that Oct. 14, 2008 will be remembered as the moment when an inflection point happened." He said other computer makers have already expressed more interest in the chipss. "You'll see other designs over the next few weeks and months," in time for the holiday season, he said, though Apple won the opportunity to release it first.

Apple just weighed in on one of the most intense battles brewing in technology. Nvidia and AMD's ATI graphics unit have long vied for supremacy in their niche. Patrick Moorhead, AMD vice president of advanced marketing, recently showed me a demo to drive home this point; he displayed two computers, one with AMD graphics and one with Intel's basic integrated graphics, running the popular Iron Man game and playing "The Simpsons Movie."

The Intel-powered machine failed to display some ceilings and walls in the Iron Man game, and sputtered during complex scenes in the movie; the AMD-powered machine handled both smoothly. Adobe Systems (ADBE), maker of graphics-heavy software programs like Photoshop, Flash and Illustrator, recently threw its weight behind the graphics chipmakers' point of view; its latest version of those programs, CS4, is crafted to tap a graphics processor for a speed boost.

Intel, meanwhile, is not sitting still. In the hours after Apple's laptop announcement, it put out a statement saying it intended to fight hard for Apple's future business. One of the ways it will do that, no doubt, will be to try to lure Apple back into the Intel fold with its own upcoming graphics processor, code-named Larrabee, which will use multiple Intel computing cores to deliver extra visual oomph. The first products should arrive next year at the earliest.

So where does all of this leave consumers? And will Apple's move really make U.S. computer buyers smarter about buying PCs? In the short term, probably not. The most affordable laptop to carry the chip so far costs $1,299, and folks like Hewlett-Packard (HPQ) and Dell (DELL) sell laptops with discrete graphics processors for less money. But Apple's embrace of graphics is clearly just a first step — it's only a matter of time before it begins offering similar graphics performance in systems priced at $1,000 or less, and then in every computer it makes.

And that's when things will get really interesting. Once Apple has built special graphics capabilities into most of its consumer systems, it's sure to release a new version of its iLife software suite that takes advantage of the extra speed. And once that happens, it's possible that mainstream American consumers will finally start to see the benefit of investing in graphics when we buy PCs — and those Europeans will have one less thing to snicker about. (MSFT)

It's going to be a frightful holiday season for PC sales, no matter what.

That was the hidden message Intel (INTC) executives delivered in an earnings conference call with analysts Tuesday afternoon after reporting better-than-expected quarterly profits but disappointing sales. They also said Intel is better off than competitors because of its streamlined workforce, world-class manufacturing operation, popular new Atom chip and rebounding profit margins. But tucked into that happier talk was the harsh reality that it's getting ugly out there.

How ugly? That's the $800 million question.

Looking ahead to the typically jubilant holiday quarter, Intel expects sales somewhere between $10.1 billion and $10.9 billion. In other words, Intel's worst case imagines fourth quarter sales that are actually lower than third quarter sales – a "Grinch steals Christmas" scenario. And the best case? That has sales up less than 2 percent from last year – a "coal in the stocking" scenario that Intel said is "at the lower end of seasonal patterns." Neither possibility spreads a lot of cheer.

The reason for the bad tidings, of course, is the global credit crisis. Not only has the turmoil sapped the spending power from the financial services industry, but it has spread to the broader business and consumer markets, too.

Why? If companies have trouble borrowing money, they'll be less likely to buy PCs and servers that use Intel chips. And if consumers can't tap into their home equity and are afraid of losing their jobs, they'll think twice before shelling out hundreds (or thousands) of dollars for a new laptop.

Intel CEO Paul Otellini said the credit headaches didn't have much impact on the third quarter. Intel reported net income of $2 billion, or 35 cents a share, on sales of $10.2 billion. Sales were lower than analysts expected, but earnings per share were higher, thanks to a tax break from overseas losses. (Intel had expected an effective tax rate of 33%, which would have brought EPS down a penny; instead, it got 28.9%.) Intel shares gained more than 4% after hours to $16.66.

The current quarter is a different story. Business so far has been good – executives are confident that profit margins will hold steady at 59% plus or minus a couple of points — but Intel is getting mixed signals from its contacts on what will happen next. "Some customers and channels are seeing little to no impact, and some are worried," Otellini said. "As we add it all up, we don't know how much of that worry will manifest itself into reality."

Don't expect the PC makers who buy from Intel to clear things up anytime soon. Hewlett-Packard (HPQ) and Dell (DELL) aren't scheduled to give updates to Wall Street until the second half of November. And Apple (AAPL), the fast-growing computer maker, sounded optimistic when it unveiled new laptops Tuesday – but CEO Steve Jobs also announced that he'll start buying some key components from Nvidia (NVDA), which will mean less money in Intel's coffers at a time when every dollar counts.

Even so, Otellini had some encouraging words about Silicon Valley's prospects. This downturn, he predicted, won't be as bad as the dot-com crash.

"One of the things I recall vividly in that one was that people stopped buying computers, principally because there were so many available on eBay (EBAY) from companies that melted down. That skewed demand in '99, '00, and '01 as a result," he said. Intel isn't seeing the same fire sales — at least not yet — and growing markets like China are still important, according to Otellini. "Right now, I'm of the opinion that technology will do well during a downturn, because of the simple fact that we sell tools of productivity."

We won't have to wait long to see whether that optimism sticks: In an unusual move for Intel, executives said Tuesday they will update investors a week after Thanksgiving. By then, they should have a better sense of whether investors should expect the Grinch, or the coal in the stocking.

Click above for video of AMD vice president Patrick Moorhead talking about how the chipmaker will face the competition from Intel and turn things around.

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