Why AMD is betting big on virtual reality

Virtual reality is key to the chipmaker's turnaround strategy

Posted July 6th, 2016

Advanced Micro Devices CEO Lisa Su was conducting a live interview with CNBC's "Squawk Alley" a few weeks ago when the questions turned to one of this year's most buzzed-about technologies: virtual reality. 

"Virtual reality is one of those great applications that just changes the way you deal with immersive applications and devices - and it's not just gaming. It's really across a number of different segments," Su told the CBNC reporters. "We actually really believe that as we get the performance levels to the right place we can get the next 100 million VR users - and that's our goal."

Su's answer shed some light on how important virtual reality is to AMD, which began talking about the importance of VR early last year. The company is aiming to be the dominant chipmaker for virtual reality systems, a market that Goldman Sachs is predicting will reach $80 billion by 2025

AMD, which is headquartered in Sunnyvale but has substantial operations in Austin, makes computer processors and graphics cards that are used in personal computers, gaming consoles and servers. The company employs about 1,600 people in Central Texas. 

The year of VR

AMD has been plotting its virtual reality strategy for "a couple of years," according to Sasa Marinkovic, the head of VR marketing for AMD.  

He said some of those early seeds were planted years ago, when the chip company had the CEO of virtual reality headset-maker Oculus at its developer summit back in 2013.  

Those plans are coming to fruition this year with a host of new products that are tied to virtual reality. AMD said in March that its chips power 83 percent of the market for virtual reality game consoles and VR headsets. 

AMD recently released its first VR-capable graphics cards, called Radeon RX 480, which are based on its new Polaris design. These graphics cards, called graphics processing units or GPUs, can be bought directly by the consumer or packaged as part of a high-end gaming system.

The price point is the important part: AMD will sell it for $199, making it at least $100 cheaper than its main competitor, Nvidia Corp. 

That still makes the total cost of a gaming system, which includes the cost of a VR headset, at around $1,400

"We took a different approach, and said 'Let's drive these premium VR experiences for the mainstream user and really expand the ecosystem and how many people can afford a VR-ready graphics card," Marinkovic said. 

The consoles are coming

Nathan Brookwood, an industry analyst for Insight 64, described virtual reality as a chip designer's "full employment act for the next decade."

He said virtual reality demands more performance from a graphics card than pure gaming. 

"It is the most demanding thing we've asked the GPU to do in a long time," he said. "That bodes well for both AMD and Nvidia in terms of creating demand for chips that are a little bit higher-end than the low-end chips that are thrown into PCs."

AMD is also hoping VR will help drive more consumers to buy new video game consoles. 

The chipmaker helps provide processing and graphics power to all the major video game consoles: Microsoft, Sony and Nintendo. Only Sony so far is set to release its own VR headset later this year. 

"If you look at the three big gaming console companies, the average upgrade cycle has been about six years," said Matthew Ramsay, a financial analyst with Canaccord Genuity. He said the threat of new content coming has shortened those upgrade cycles to about three to four years. 

AMD also wants to be the go-to chipmaker for VR developers. The company announced in March a special graphics process for VR developers called Radeon Pro Duo, which retails for $1,499. It is packaged with AMD's "LiquidVR" software. 

A sales slump

AMD has struggled in recent years. 

The chipmaker hasn't reported an annual profit since 2011. In the last quarter it lost $109 million. Its sales declined nearly 28 percent in 2015 from the previous year

Much of AMD's troubles are due to the sales slump in the PC market, and that AMD has been the underdog in both of its biggest markets, graphics chips and computer processors, for a long time. Those markets are dominated by Intel Corp. and Nvidia Corp. respectively.

But the company has taken steps to right the ship and ease its debt load. AMD recently made a licensing deal that generated $293 million in income, plus future royalties, and AMD sold its majority stake in its Asian manufacturing operations for $371 million

The chipmaker has also worked to diversity beyond the PC market, and there is considerable optimism on Wall Street that their might be brighter days ahead for AMD. Since the beginning of this year their stock has increased nearly 86 percent. 

Will it work?

Ramsay says he's a believer in AMD's turnaround potential. 

The decision to sell some assets and the licensing deal helped some investors take the company's growth strategy more seriously. "You don't have to worry about bankruptcy risk anymore," he said. 

He credited the company for making investments in new products and development tools in order to become more competitive. Ramsay currently has AMD rated as a "buy."

But there's plenty of skepticism about the role virtual reality could play in AMD's revival. 

The technology is still in its infancy, and is only being embraced by early adopters who can afford the expense of a new virtual reality system. There's also the question over whether virtual reality will remain a niche slice of the gaming market or become more mainstream. 

"I'm more skeptical of VR than some other people," said Roger Kay, an industry analyst. 

He said he sees a bigger market potential for augmented reality, which still allows the user to be aware of their surroundings. "For now, it's mostly gamers."

But even a skeptic admits that it makes sense for AMD to focus heavily on VR. 

"AMD has to do 'Hail Mary' kind of activities because their back is against the wall," Kay said. "They need to take a fairly high risk and take big bets on things that might pay out because that's what will get them out of the hole." 

The payoff is years away

AMD and analysts say it will be  years before we know if AMD's bets on VR really pay off. 

This year, tech research firm IDC estimates that 9.6 million virtual reality headsets will be sold.  That number could grow to almost 65 million by 2020. "VR is a very attractive technology and it will take some time to develop," Su said during the CNBC interview. 

She estimated between three to five years before VR becomes more mainstream. 

"You build up from 1 million users to 10 million to 100 million," she said. 

Mark Matson/FOR AMERICAN-STATESMANAMD's Austin campus is off Southwest Parkway.