Intel’s launch of its Nehalem server chips (Xeon 5500) into the market represents not only a new direction for the company’s Xeon processor line, but also a new phase of competition with arch-rival AMD. For the first time, the competing Intel Xeon and AMD Opteron product lines will be based on essentially the same fundamental architecture — a multicore design with on-chip memory controllers and a point-to-point processor interconnect.

Although AMD has used this basic design in its silicon for years, with Nehalem, Intel has in many ways improved upon the model. Based on current benchmarks, most analysts (and even AMD) would agree that the new 2P quad-core Nehalems outperform their AMD “Shanghai” counterparts. (For now, Shanghai still rules in the 4P and 8P space since Intel has yet to release corresponding Nehalem parts.) The new Intel products have accomplished this with a more aggressive QuickPath Interconnect implementation, DDR3 memory, a larger L3 cache, and a hyper-threading capability that can simultaneously execute two threads per core.

I spoke with John Fruehe, AMD’s worldwide business development manager, to get his take on how Nehalem will challenge AMD’s Opteron product line and what AMD has in store over the next 12 months. In general, Fruehe maintains his company is sticking with its game plan that focuses on energy efficiency, price, and platform stability. From his perspective, this strategy plays directly into Nehalem’s weaknesses and will be especially important in an economic climate in which cash-strapped customers are looking for ways to reduce capital expenditures.

In the next few weeks AMD is planning to announce some new higher performing Opterons in the low-power (55W) HE product line. Fruehe says they will also introduce some even lower-power server chips than the HE parts. All of these products are geared toward customers looking to minimize their energy footprint, which these days is basically everyone.

In the second half of 2009, AMD is scheduled to launch “Istanbul,” its six-core version of Shanghai. Istanbul ostensibly competes against Intel’s six-core Dunnington chip released last year, but with the Nehalems now running loose, AMD will be likely be positioning its six-shooter against Intel’s latest and greatest. Istanbul will also include “HT Assist,” a probe filtering technology that improves memory throughput by optimizing cache access. For HPC applications, especially, the improved six-core performance should keep AMD in the game for the remainder of 2009.

“But the real product that will compete against Nehalem is when we get into next year with the G34 platform,” says Fruehe. According to him, that platform will outgun the Xeon competition. The first processors to land on the G34 platform will be the six-core Sao Paolo and 12-core Magny-Cours. Like Nehalem, AMD’s next generation platform will support DDR3 memory. Fruehe pointed out the G34 design supports four-channel DDR3 compared to Nehalem’s three-channel setup. G34 will also include four HyperTransport 3.0 links to help cope with the increasing I/O traffic resulting from more cores.

On paper, G34 looks like it competes well against the Xeon 5500 design, but by the time it’s launched in 2010, Intel may have already moved on to “Westmere,” the 32nm process shrink of Nehalem. Because AMD lags Intel by 6 to 12 months on a number of technology fronts, it will have trouble playing leapfrog with its larger rival. But being on the bleeding edge can cut both ways and Fruehe was quick to point that out.

For example, forcing your customers to do a forklift upgrade every couple of years because you’ve switched chipsets may be a way to eke out the best performance, but it becomes an expensive proposition for customers. Fruehe noted that AMD has been much more focused on pricing and platform longevity than its rival. For example, the Socket F design introduced in 2006 provided the platform for multiple generations of Opterons, from the dual-core and quad-core chips through the upcoming six-core Istanbul.

Maintaining platform compatibility over a multi-year timeframe means customers can upgrade systems relatively inexpensively by plugging in new chips and upgrading the BIOS. Being able slip the latest Opterons into existing servers has been an especially useful way to extend the lives of multi-million dollar supercomputers. For example, last July TACC replaced all 15,577 quad-core Opterons on its half-petaflop “Ranger” cluster with a slightly faster processor, effectively adding 75.4 teraflops to the system’s peak performance rating.

“It’s pretty clear that there’s plenty of innovation that can happen within a platform without having to change everything,” says Fruehe. “We don’t buy into the argument that you need to rip everything up or push your customers through a lot of churn just to get an advantage over your competitor.”

Fruehe also believes Intel’s early bet on DDR3 memory is going to work against them. From his perspective, although DDR3 offers higher capacities in terms of total addressable memory, the hardware costs more, draws more power and has higher latency than DDR2. Fruehe thinks Intel miscalculated where the DRAM industry was going to be in 2009 in regard to DDR3, mainly because of the unforseen consequences of the economic downturn on the major Taiwanese memory manufacturers.

“[Intel] put their money on red and the Roulette wheel came up black on this one,” says Fruehe. According to him, the shortcomings of DDR3 should be addressed over the next year as the market matures. Fruehe admits that DDR3 memory will be “awesome,” but not until 2010, when, coincidentally, AMD jumps onto the technology.

Of course, the major architectural changes implemented in Nehalem didn’t leave Intel much room for backward compatibility. But the fact that it now has to sell such chips into an economic headwind is going to make that transition harder. Certainly, customers are going to have to balance gains in performance or energy efficiency against the cost of new Nehalem-based gear.

“We did a little math on one of the OEM’s Web sites yesterday, and the lowest-priced Nehalem configuration is higher than the most expensive Shanghai configuration,” notes Fruehe. “So there’s obviously a price premium the customer is going to pay. Some of that comes from the DDR3 memory and some of that is just a price premium on the platform itself.”

He estimates that customers that buy Nehalems this year will pay an extra 50 percent or more compared to similarly configured systems. Intel’s marketing juggernaut may be more than enough to overcome any such sticker shock, especially if it can make a case for a short-term payback on new equipment. For now, AMD seems content to make its big platform shift next year and hope that 2010 brings a return to prosperity in the IT sector.