Shares of semiconductor company Advanced Micro Devices, Inc. (NYSE: AMD) fell more than 4 percent on Tuesday after the company said its margins shrunk in the fourth quarter as a result of its brutal pricing war with rival Intel Corp., (Nasdaq: INTC). With both firms increasing capacity and becoming more aggressive, some analysts believe prices on CPUs will continue to decline.

AMD did well at the start of 2006 as it took a head start in the high margin server market by introducing more powerful and energy-efficient chips compared to its crosstown competitor.

Intel turned the tables during the summer however, introducing the enterprise grade Woodcrest CPU, which forced the firms to resort to cutting prices.

We think that AMD's challenges stem largely from Intel, who has appeared to have closed the gap with AMD, particularly in servers, to the point where it has been able to materially impact pricing, Prudential's Mark Lipacis said.

While Lipacis expects AMD take some market share from Intel during 2007, he said both companies are likely to add capacity, causing them to become even more aggressive with pricing. The results will mean CPUs for enterprises, but at the expense of continued erosion of both companies' margins.

The price war with Intel is taking its toll and we see no strategy changes from either AMD or Intel being implemented, even as numbers begin to turn towards the red, commented Doug Freedman of American Technology Research.

Slashing prices may not be limited to just server processors either. Research analyst Joe Osha of Merrill Lynch believes the ongoing rivalry between the firms will overflow into the consumer segment, potentially lowering the prices of everyday computers and notebooks.

With AMD doing well in the notebook market over the past few quarters, we won’t be surprised to see Intel getting more aggressive in the notebook market as well

when it introduces the new Santa Rosa platform in Q2 this year, Osha said.

Unless either company makes a drastic change in upcoming months, the winner will remain the same: the consumer.

Shares of Intel gained 22 cents, or 1.07 percent, to $20.77 in afternoon trading on the Nasdaq Stock Market. Meanwhile, shares of AMD fell $1.34, or 7.6 percent, to $16.18 on the New York Stock Exchange.