AMD recently announced that they massively missed their quarterly numbers, and that they plan to lay off 15% of staff. Of course they are blaming it on the economy, but as a long-time follower of the CPU scene (and a perpetual fan of the underdog AMD), I can say that isn't really the case. Sure, PC sales may have ticked down a bit, and even Intel's numbers lagged this quarter, but the real problem is that AMD has become irrelevant by failing to release competitive chips. They relied on the low-end market for the bulk of their sales, which was and extremely dangerous move (as I will explain later).
About ten years ago, I wrote a column about AMD's upcoming Athlon 64 processor, which was to be the first mainstream 64-bit processor. At that point, 64-bit processors were exciting because they finally allowed PCs to address more than 4GB of RAM, and also offered a number of improvements that are extremely exciting to CPU geeks. While Intel had offered 64-bit processors in a few high-end workstations, they were ridiculously expensive, and never really caught on. AMD was essentially offering an affordable processor with next-generation capabilities.
I actually bought one of the first-gen Athlon 64s soon after they launched. I loved that machine, and every now and then, I drag it out of the closet whenever I need an old Windows XP machine for some testing. The Athlon 64 had a long life as a desktop processor, and it was also popular in servers. A number of top tech companies used it in their servers because it could do more work per watt of power consumed (which is the most important thing once you reach that scale). In fact, Dell sold a diminutive computer just a couple years ago with an original Athlon 64 inside.
The problem was that the Athlon 64 was pretty much the last in AMD's string of hits. Intel quickly eclipsed them by releasing the first dual and quad-core CPUs, and managed to scale performance much more quickly. While AMD did pretty well in the server market, 64 bits didn't offer a huge advantage on the desktop, and Intel eventually released their own processors that were 64-bit compatible. By the end of the decade, AMD needed a new hit. They did manage to release an affordable 6-core processor - I happen to own one of those, being the CPU nerd that I am. However, Intel's midrange i5 offered more performance at tasks that don't require massive numbers of cores, so they sold modestly at best.
AMD needed a new hit. They bet on an entirely new architecture, nicknamed Bulldozer, which completely rethought the way that chips were designed (I won't go into the specifics, but it attempted to compete with Intel's Hyperthreading technology). It promised up to 8 cores on a single chip, where Intel offered a maximum of 6. The problem was that Bulldozer was about a year late, and when it finally came out, performance was much lower than expected. In fact, the Bulldozer processors are usually slower than the generation that they replaced. AMD pretty much admitted defeat on that one, and announced that it was basically withdrawing from the high-end PC market (although they continue to make processors for the server).
So AMD retreated to the low-end, releasing chips that performed modestly for a reasonable price. Since acquiring ATI in 2006, they have focused on creating chips with integrated graphics capabilities. At the low-end, they offer significantly better graphics performance than Intel's integrated graphics, and a lower price. The problem is that the margins on these low-end PCs are small, and they are extremely sensitive to economic fluctuations (AMD actually had to take a write-down because they have so much unsold inventory). Although AMD managed to turn a profit in the past based on these processors, it's unlikely they will be able to continue this in the future. More importantly, ARM is taking over the low-end.
As I've pointed out in a few previous posts, ARM is quickly increasing its chip performance to the point where it overlaps with low-end PCs (for the uninitiated, ARM designs power most smartphones and tablets on the market these days). People are already replacing their laptops with tablets (one of the real reasons AMD's sales have dropped), and within a year or two, we will be seeing PCs and laptops based on the ARM platform. Google's just-announced Chromebook is only exceptional in that it features an ARM processor rather than an Intel chip. And rumor has it that Apple is considering moving its Macbook Airs to ARM, which would allow them to decrease size without compromising on battery life.
So AMD is being squeezed on both ends. At the top-end, Intel is beating them on performance, and on the bottom, ARM manufacturers are eating their lunch. They have a few reasonably competitive products in various niches, but that's about it. This is pretty much the classic story of a company undergoing disruption by competing technologies. My guess is that it struggles along in mediocrity for a few more years, and then either exits the processor business entirely or is acquired by a competitor. It's possible that AMD will pull an ace out of its sleeve with the next generation of processors (currently not even on the roadmap), but it seems like this might be the end of the rope.