Before anyone gets too excited OTOY is *not* a public company right now.

We just published our Thought Leader Interview with Jules Urbach, the Founder and CEO of OTOY. Unlike many of the other players in the space, Jules and OTOY have not been out endlessly hyping and promoting their technology. As Jeff Bezos has recently said, the future of product marketing is in making great products and customer experiences.

OTOY has tamed the massive power of GPU computing to make cloud computing for the most demanding gaming and engineering applications possible. There are a number of fundamental innovations and strong implementations that enable the OTOY “magic” that can deliver stunning content and interactivity inside a browser or mobile Internet device.

More generally, this interview touches on some of the larger industry players including Google, Apple, Nvidia, AMD and Intel along with some approaching key crossover points in the market as technology evolution around broadband speeds, content quality and social networks continues.

The GPU is being woven into the thread of nearly every application and this trend is firmly rooted. For example most of the leading browsers will be exploiting GPU technology to accelerate performance. The same is true for gaming consoles and devices. Microsoft even developed their own silicon that combines CPU and GPU for a future Xbox. So the GPU has become mainstream and new applications are being spawned that will keep the technology curve moving up and to the right. Singularity anyone?

The interview is freely available on the R2 Thought Leader page.

[Disclosure: None.]

The last couple of months have been marked by a broad set of positive developments for the GPU makers, especially Nvidia and AMD. Some of the highlights have been:

Application acceleration goes mainstream. – The leading creative application providers, Adobe and Autodesk, are embracing the GPU and driving the requirement for one into space of generalized computing. This actually started with prior generations of the software but we’ll see more of this in products like Adobe Creative Suite Version 5 but even Flash will take advantage of the GPU to improve performance and the experience.

Internet video gets serious. – Video is one of the leading new applications for the Internet today and it is shifting from the short grainy YouTube content of yesterday to high definition, in some cases even 3D, content. This level of digital video demands more processing power to produce and even to view properly. Everybody want’s video, more so than even text and browsing, and it’s another good reason to have a GPU in computer, especially mobile Internet devices.

GPU in the cloud. – Until recently it wasn’t clear if GPU computing power would be available in the cloud. Given the success of generic on-demand offerings from Amazon, Google and others it seemed only matter of time before we would begin to see it. Both AMD and Nvidia are working closely with the major players and we will see GPU processors on-demand and in the cloud pervasively in 2010.

Cloud-based GPU applications are shipping. – Mental Images has announced and is providing Reality Server which represents the high end of digital image rendering in the cloud. Some companies are using it today with their own cloud servers. Application platforms like OTOY are enabling the highest end of gaming even on mobile devices like the iPhone using cloud-based GPU software and acceleration. Here is a link to a Techcrunch post on OTOY back in June of 2009. We also covered a demonstration of OTOY in our short research report on the 2009 Gilder Telecosm Conference. It’s available in the sample publications section of our website.

3D content has arrived. – The cinema industry has embraced it. Avatar is in theaters this week. A big difference today is that the cinema industry creates content in native digital form which means that content can be moved rather than redeveloped into other formats for games, short videos, images and other forms of consumer entertainment content.

Standards are emerging. – Although there is still plenty of bickering over PhysX versus OpenCL and DirectX versus others, these technologies are settling into mainstream software like applications, browsers, and operating systems. In cases were two important standards make it, it looks like they will both be supported. This makes it possible to deliver high-end graphics and 3D applications to a large market.

We expanded on the mobile 3D theme further in a report published yesterday by GigaOM called: 3-D Untethered: A Look at Mobile 3-D Technology (GigaOM Subscription).

On top of all the industry adoption Intel settled with AMD and paid them $1.25B, scrapped their Larrabee-based plans to enter the discrete GPU market and is under further FTC investigation for trying to screw Nvidia.

Put simply the industry is shifting to video, 3D, and mobile and right now this leaves Intel mostly out of the action. It’s great news for Nvidia, AMD, ARM, Imagination Technology, Qualcomm and a host of other semiconductor makers.

When it rains, it pours.

[Disclosure: The Research 2.0 model portfolio has positions in both Nvidia and Qualcomm.]

Analysts stumbled over themselves to make punishing comments on AMD post their analyst meeting. 

We don’t normally take an interest in companies like AMD but you could cut through the analyst and investor frustration with a knife.  Of course management didn’t paint a very encouraging picture.  Imagine addressing the analyst community with the line "[we admit to a] lack of profits in all businesses, appallingly negative cash flow, poor distribution management and large market share declines."  Yipes!

Part of the problem is as hard as they tried management demonstrated that they have a hard time understanding the investment community.  The fact that the Chairman of the Board, Hector Ruiz, exclaimed that he doesn’t understand how the valuation of the company could be worth 40% less than it was just a short time ago.  Well Hector, when you have a pile of debt and you are losing money in all your businesses it can compress your equity valuation pretty fast!

Setting aside the angst for a moment there is probably more potential in the name for 2008 than many might think.  Historically AMD was only an also-ran to Intel which is how they are often looked at today.  However AMD has changed some things in the last 12 months that make the situation different.

For a little while they were ahead of Intel which helped shift their image a bit (and also took a chink out of the Intel brand.)  While Intel is now back in the drivers seat AMD will lose share in servers and the core PC market.   But AMD will maintain a steady if lower share nonetheless.

AMD may have overpaid for the ATI acquisition but it has given them a much better foothold and set of growth opportunities then they have ever had.  While the Intel/AMD analysts panned AMD there were a few who cover Nvidia and the graphics space who noted that due to a fresh product cycle and a number of design wins AMD/ATI is poised to gain share in the graphics space during 2008 at the expense of Nvidia.

Beyond the two core markets there are some sideshow attractions in mobile and flat-panel TV that may also help a little bit.  If they can diversify their handset business to other manufacturers it could be more than a little.

The key is still getting operations back in order and making the new plan work.  Production has to ramp, promises have to be kept and numbers have to come in at or better than guidance which is for break-even in Q2. 

AMD will be CapEx constrained in 2008 and looking to turn some portion of their $600M in excess assets into cash which should provide some additional cushion for operations.

The last thing that is a little bothersome is the absurdly aggressive long-term targets the CFO put out there.  The near-term 2008 plans are reasonable and call for excellent execution.  Then the long-term plan jumps up to 18% to 24% operating margins!  What?!  We’d say that 15% would be an admirable and almost miraculous result from here.  How can management put these numbers out in this environment? 

It only provides evidence that AMD management just doesn’t quite know how to talk with analysts, investors and the market.   Taking it all in suggests that there probably is more value in the business than the current valuation accounts for.  We don’t agree with the management plea that "the glass is half full" but if they can execute on the basics in the next few quarters there is more upside than if they were just the #2 CPU company in the market.

– Kris Tuttle

[Research 2.0 purchased a small position in AMD post their analyst meeting.]

Tags: AMD, IR