Low-cost market using Intel less

As Compaq Computer prepares new low-cost consumer PCs and NEC rolls out a sub-$1,000 notebook, new research from International Data Corporation shows that Intel continues to be challenged at the low end of the PC market.

Compaq is getting ready to introduce five new consumer PCs in January, with three of the computers expected to be priced between $699 and $999, according to sources. Of all the new systems being readied, only the priciest--a system estimated by industry sources to cost $2,100--will offer an Intel chip.

Prices could change by the time of the system's introduction.

Meanwhile, Packard Bell NEC is introducing a $999 notebook with an 8-inch dual scan display and a chip from National Semiconductor's Cyrix arm, the companies said today.

As components such as displays, hard drives, and non-Intel mobile chips continue to drop in price, the sub-$1,000 price point may become as prevalent in the mobile space as it has in the desktop space, analysts say.

Sub-$1,000 market a challenge for Intel
That possibility presents a new wrinkle in a continuing challenge for Intel--how to get inside sub-$1,000 computers.

A new survey from IDC indicates that Intel's efforts to muscle back into the sub-$1,000 PC market with its Celeron processor did not have much of an impact in the third quarter of this year, though recent anecdotal evidence indicates that the enhanced version of the Celeron is getting a better reception with PC makers.

In the third quarter, the total unit sales in the Intel and Intel-compatible microprocessor market increased 22.6 percent over the previous quarter, with more than 90 percent of the quarter's shipment increase coming from the low end of the market, the report said.

Advanced Micro Devices and Cyrix continue to be the predominant supplier of chips for cheap PCs. In the third quarter, AMD has doubled its share of the Intel-compatible chip market to 13 percent from the same quarter a year ago, in turn reducing Intel's share of the market to 76.3 percent from 86.2 percent a year ago. That's a new low for Intel, according to the report.

"To date, Intel has delayed introducing new technologies into its Celeron family to play up the value of developments within its Pentium II line. We believe this technology withholding is hurting Intel, and allowing competitors...to grow share," Kelly Henry, senior semiconductor analyst for IDC, said in the report.

Overall, however, Intel's profitability isn't hurting. Third-quarter microprocessor unit shipments and revenue were both company records, Henry said, and gross margins increased again after reaching a low point in the second quarter.

Intel not inside
Compaq's new Presario 2286 will ship with a Cyrix MII processor, while two new Presario 5200-series systems will be priced below $1,000, sources said. Compaq declined to comment on as-yet unnanounced products.

The Presario 5200 systems are expected to offer either a 350-MHz or 380-MHz AMD K6-2 processor, 64MB of memory, an 8GB hard disk drive, and a "SuperDisk" drive that reads current floppy disks but can store up to 120MB of information. A system with an Intel 450-MHz Pentium II, 128MB of memory, 19GB hard disk drive, DVD-ROM drive, and a SuperDisk drive is expected to be priced under $2,100, according to sources.

Intel's Celeron processor, which is being aimed for use in low-cost PCs, is notably absent from the lineup of the world's largest PC maker. Analysts say PC makers may be reluctant to use the chip due to the public's perceptions about the Celeron chip.

"Celeron still has a stigma of being a lower-performance chip" in the minds of both consumers and retail salespeople from the product's introduction last summer, said Cameron Duncan, an analyst with ARS.

Compaq, however, is already using the enhanced 333-MHz Celeron in a number of low-cost consumer models, so this chip may be stemming the tide of non-Intel sub-$1,000 to some degree.

But Intel may face a challenge in the notebook market as well with some sub-$1,000 portable PCs showing up on store shelves now.

"The non-Intel processors are helping to drive down the costs because Intel seems to be focusing on the high-end processors," said Terry Nozick, managing editor of Mobile Insights, a mobile computing newsletter.

Packard Bell NEC is offering the NEC Ready 120LT for $999. The 3.6 pound notebook comes with a relatively small 8-inch dual scan display and has a 200-MHz class Cyrix processor. Manufacturing costs for this notebook are reduced because the Media GX processor integrates the functions of several different components including audio and graphics, according to Cyrix.

"This is an indication of where things are going, and it's not such a surprise," Nozick said, pointing to recently introduced $1,400 loaded notebooks from premium vendors such as IBM.

But even with the component price drops and the reduced manufacturing costs from integrated processors, features on which consumers place a premium--such as durability and portability--will continue to keep the high end of the market afloat.

"There's a large segment of the market that's really price conscious, but I don't know if that's always a wise decision," Nozick said. "There's been a big trend toward moving to magnesium alloy cases, which are lighter but much more durable. You're not going to see a sub-$1,000 that has a magnesium alloy case, because magnesium alloy at this point is more expensive material to use for ruggedization."

Also, the high end of the market is currently inhabited by 300-MHz Pentium II chips. The MediaGX is roughly comparable in performance to the older Pentium MMX chips.

Intel is an investor in CNET: The Computer Network, publisher of News.com.