In part one of this two-part series, we look at the evolution of AMD from a second-source supplier for companies using Intel processors towards CEO Hector Ruiz's ideal of a "premium" chipmaker that could sell to the likes of Dell and Intel.

On June 10, 2000, Advanced Micro Devices (AMD) wanted to party—and party big. The company’s CEO, Jerry Sanders, arranged to rent out the entire San Jose Arena (now called the HP Pavilion) and then paid big bucks to bring in Faith Hill and Tim McGraw, the husband-and-wife country music superstars.

Employees “could bring anybody, your wife, your kids, your friends—it was big doings. There were celebrations, gifts and awards,” recalled Fran Barton, who served as AMD’s chief financial officer from 1998 to 2001. The boss even got in on the fun. “[Sanders] was on a high wire, he did a unicycle ride. It was totally Hollywood. He could really put on a show when he wanted to put on a show.”

And why not celebrate in style? AMD’s successful Athlon chips—Ars named the Athlon its "CPU of the Year" in 1999—had finally put the screws to archrival Intel, and in 2000 the company earned nearly $1 billion in profits.

By 2005, years of solid chip design and technological execution had the company walking with a swagger, as seen in marketing stunts which challenged Intel's then-current server processors to a "dual-core duel.” Nowhere was this attitude more apparent than AMD's 2005 lawsuit against Intel for anti-competitive business practices.

Doubters didn't think the good times could last. "I rode through a few such cycles and can recall the zenith of decadent exuberance and breathtaking spectacle in 2000 when AMD's then showman CEO, Jerry Sanders, clad in tight leather pants, shirt cracked open to the waist, descended to the stage of the HP Pavilion in a cherry-picker and announced that AMD's stock would soar to over $100 per share and that another [chip fabrication plant] would be built in Austin,” recalled Bill Bushnell, a rank-and-file veteran software engineer at AMD, in an e-mail to Ars. "Neither occurred."

AMD has been on a notable drop for nearly a decade now. To put it mildly, 2012 was a rough year: AMD lost over $1 billion, effectively wiping out its $471 million profit in 2010 and its $491 million profit in 2011—its two most profitable years in the last decade. Over the last 15 years, AMD has sustained a net loss of nearly $7 billion, and the company has been downgraded by credit rating agencies, burned by lower demand for PCs (and hence, for its products), and even called "un-investable" by one Wall Street analyst.

Last month, the company even sold (and then leased back) its corporate headquarters in Austin, Texas for $164 million as a way to make some quick cash. After years of technical stumbles, Intel now runs circles around AMD in desktop, laptop, and server CPUs, while newcomers like Qualcomm, Samsung, and Nvidia have used their low-power ARM chips to shut AMD out of the burgeoning smartphone and tablet markets. And critics charge that the company still has fundamental structural problems that go beyond technical missteps.

"There's no control on spending—even now, one of the problems is if you take a look at the salary structure," said Atiq Raza, the company's former president, chief technical officer, and chief operating officer, in a conversation with Ars. "[AMD is] a sinking ship, fundamentally. I really am sorry for [current CEO Rory Read]. He's a well-intentioned person but the ship has a huge hole in it. That $164 million is going to go in no time."

Raza calls the company's decline "one of the great fumbled opportunities of our time." How did AMD go from the most successful period in its history to one of its bleakest—and does the company have a fighting chance going forward?

“I couldn't fail”

When Jerry Sanders was 18, he was beaten in a street fight by people who left him unconscious in a trash can. “They fractured my skull, broke my nose—that's why you're photographing from the left,” Sanders told Daniel Marrow of Computerworld (PDF) in 2000. “So my nose is not more crooked than normal, ribs—I mean just a disaster. And they left me to die. They literally left me to die.”

But after three days in a coma, Sanders rallied.

"I once said 'I can die, but I can't fail'," he told the San Francisco Chronicle for a profile. "What I meant was, I was always going to give it my all. I couldn't fail, because failure wasn't an option. I would die before I'd fail."

Sanders went to work for Motorola and Fairchild Semiconductor, but he didn't work long for others. He opened AMD for business on May 1, 1969—when he was just 33 years old. He quickly cemented a reputation for being defiant and flashy, and he kept a poster in his office which read, "Yea, though I walk through the valley of the shadow of death, I shall fear no evil—for I am the meanest son of a bitch in the valley."

“He’s a mix between Don Quixote and Indiana Jones,” former CFO Barton said, “a swashbuckling idealist, not afraid to tilt at windmills and dream the impossible dream. His whole career, his impossible dream was to battle Intel. And he battled very hard for decades.”

AMD began life as a second-source supplier for companies using Intel processors. Companies like IBM didn't want to rely solely on Intel for one of the primary components in their computers, so they licensed AMD to produce versions of processors like the 8088 and 80286. While these CPUs were manufactured by AMD (and, in some cases, AMD was actually able to clock the CPUs higher than their Intel counterparts), almost everything about their designs came from Intel.

Beginning with Intel’s 80386 in 1985, Intel stopped giving AMD access to its designs. AMD had to forge its own way, soon producing 386 and later 486 CPUs that were essentially reverse-engineered versions of Intel’s parts.

In 1990, a Merrill Lynch analyst called AMD “dead,” largely because of the time needed to reverse-engineer the chips, just one of many times an analyst would say this about the company. Intel’s 386 was released in 1985, for instance, but AMD’s didn't appear until 1991; Intel’s 486 was out in 1989, while AMD’s wasn't on the market until 1993. The increased complexity of Intel's CPUs made the reverse-engineering process more difficult: Intel's 486 had 1.18 million transistors, and the original Intel Pentium chip had 3.1 million in 1993. The Pentium line quickly grew more complex, leading to the 5.5 million transistor Pentium Pro in 1995 and the 7.5 million transistor Pentium II in 1997. Compared to the 134,000 transistors in the 286, these were enormously difficult chips to replicate, and though AMD sold millions of its versions through aggressive pricing, the strategy wasn't viable in the long term.