What AMD/ATI is learning right now is that the high end does matter, not for profits, but for perception.
If you can't compete at the high end, people see that and think you can't compete at all.\
AMD and ATI offerings are largely price/performance competitive with Intel and Nvidia, but not at the high end, and AMD/ATI is having to squeeze their margins to get to that point. That's not a recipe for long term success. You have to have a 'halo car' type product, a product that kicks ass and has a good reputation among the enthusiast crowd so the lower levels look at that and say 'i want one of those'.
All the people acting like ATi is going to go bankrupt are hilarious though. ATi makes enough cash in the embedded/low end/entry level/oem markets to stay afloat, the high end market is only really a concern to them in that it affects the perceptions of their buyers in the other markets.
AMD as a whole is a bit more in danger, as they are getting their ass kicked by intel on a technological level, not just a design level. But even then, AMD's server stuff would be able to keep them afloat for a long time if they settled for a smaller share of the desktop market. They are slashing prices like crazy on their desktop chips to compete with Intel though, which is hurting their profitability.
Now that AMD and ATi should be well integrated, it will be interesting what they can do. The extra tech edge ATi gets from AMD should make them dangerous to Nvidia. If they can keep up with Intel's tech, they should do well against them with their design capabilities as well.
If intel keeps coming out with killer designs, they could take everyone out though, hardly anyone can compete with their tech. Maybe IBM, but thats about it.