The price war that is waging between Intel and AMD paid off handsomely for Intel in the first quarter according to the latest numbers from Mercury Research. Intel managed to capture 80.5 percent of the PC processor market for Q1 2007.

The strong performance by Intel in Q1 represents a whopping 6 percentage point increase from the 74.4 percent share that the company held during Q4 2006. The increases per segment come in at 8 percent for the desktop market, 4 percent for the notebook market and 7 percent for the server market.

Last year, AMD was quick to point out its strong growth in all computing segments. For the third quarter, AMD's share of the desktop, notebook and server markets stood at 26.5 percent, 18.3 percent and 24.4 percent respectively. The company's overall marketshare for Q3 2006 came in at 23.3%. For Q4 2006, that share rose to 25.3 percent.

Intel erased all of AMD's 2006 gains and pushed the company back under the 20 percent threshold. Analysts for JP Morgan reported that "Intel's superior products and aggressive pricing took their toll on AMD. We expect AMD to lose additional share during (the second quarter)."

AMD has responded to the best of its ability to Intel's strong Core 2-based product family and the company's steady stream of price cuts. By going toe-to-toe with Intel, however, AMD has seen its average selling prices (ASPs) fall along with unit sales.

The company also made a critical error by oversupplying OEMs with processors when they couldn't deliver on sales forecasts while at the same time leaving channel partners out to dry with processor supply. "We made a strategic risk on how we shifted our capacity to serve our customers and unfortunately some of our customers were not able to meet those very aggressive growth areas that they had so when we shifted that, we were not able to recover as fast this quarter as we would have liked," said AMD CEO Hector Ruiz in early March.

The increased pricing pressure along with disappointing sales from OEM coupled with the strong performance of dual-core and quad-core processors from Intel has taken its toll on AMD. The company posted a $611 million USD net loss in Q1 2007 and announced that it would restructure its business to cut costs.