They didn't drop the ball so much as get locked out of the market while they had a better product by Intel via illegal business practices.
The billion dollar fine they were hit with was a slap on the wrist for basically crippling their competition.
Too simplistic to say that it was all Intel's fault. AMD are as much an architect of their present position as Intel.
Even before Intel bribed Dell et al
AMD had issues with fabrication capacity. Under the cross lease agreement, AMD could outsource up to ~20% of their production to other foundries. Even with markets denied AMD,
they could not satisfy the demands of the customers that they had. It wasn't until the situation became acute that
AMD approached Chartered Semi, and even then
did not utilize the full 20% outsource allocation available ( ~7% IIRC). Why the reluctance in using non-AMD foundries at the expense of market share ? Answer: W. Jerry "
real men have fabs" Sanders. It is no coincidence that AMD only explored the use of third-party foundries to add capacity
when Sanders stepped down.
That is likely the primary reason that Intel settled with AMD for a relatively paltry $1bn (remember that Nvidia's settlement was $1.25bn, and the EU antitrust fine was $1.45bn by way of comparison). The secondary reason was just as likely AMD's desperate need to pay for debt servicing (see below) which is why the low-ball $1bn was accepted.
So, Intel is cause #1, Sanders hubris is cause #2, And of course, AMD own lack of strategic planning is cause #3....What other company overpays by 100% for an acquisition ( $5.4bn total paid for ATI - $1.7bn in cash from AMD, $2.5bn borrowed from lending institutions, $1.2bn in AMD shares) only to
write down $1.77bn less than a year later, and
another $880 million six months after that? Note that the money borrowed for the ATI buyout (and has served as a millstone around AMD's neck ever since) is actually less than the write down associated with the AMD's initial overvaluation of ATI. Also note that AMD was the only company interested in buying ATI in 2006.
ARM might be interesting, but I suspect that it will take forever for developers to switch over from x86. It could be a good thing if it happens though, a clean break for the next gen of computing.
That is why AMD acquired SeaMicro. Investing in a company that has an existing knowledge base of ARM and it's implementation is easier and less resource hungry than bootstrapping AMD into the ARM environment