Tech Industry

Low-cost chip war intensifies

Price battles escalate between Intel, AMD, and Cyrix, keeping PC prices low.

Like two late-night TV pitchmen, Intel and Advanced Micro Devices will both be vying for the right to say they will not be undersold when it comes to low-cost processors this fall.

Intel is expected to cut prices on its Pentium II and Celeron processors October 25, a move that will be followed by price cuts on AMD's K6-2 and K6 processors in the same week.

When the dust settles, Intel's 333- and 300-MHz Celeron chips with integrated cache memory will be selling for $160 and $139, respectively, according to sources.

AMD's K6-2 and K6 chips, meanwhile, will sell for 25 percent less or lower. AMD typically releases wholesale prices for its chips that are 25 percent cheaper than Intel's products. But AMD chips typically sell for even less than that.

Interestingly, its processors are often available at retail for less than the official wholesale posted price. K6-2 chips will compete against the Pentium IIs for pricing while the K6 chips themselves will be priced against the Celerons.

AMD processors often appear in sub-$1,000 PCs. For example IBM offers an Aptiva consumer model E2U for $899 at retailers such as CompUSA. IBM also sells fully-configured systems with AMD processors, such as the Aptiva model E3U around the $1,000 price point with faster AMD processors.

Meanwhile, National Semiconductor's Cyrix arm continues to deliver ultra-low-cost chips. South Korea-based emachines is slated to come out with a $399 PC next month based on a Cyrix chip. Also, Microcenter is already selling a $399 PC with a Cyrix processor.

Intel cutting low-end chip prices
Processor Sept./Oct. '98 price Oct. 25 price
333-MHz Pentium II $234 $175*
333-MHz Celeron $192 $160*
300A-MHz Celeron $149 $139*

*estimates. Sources: Various

In addition, price erosion at the low end of the market acts like gravity for higher-end chips. Intel's new Katmai chip, a processor designed for performance PCs coming in the first quarter of 1999, will debut at under $600, according to sources, a relatively low price point for a new Intel chips.

AMD, for its part, will be releasing a 400-MHz version of the K6-2 in the fourth quarter, and the company may even be able to eke out small volumes of its next-generation K6-3 chip--which comes with integrated "secondary" cache memory for the first time--before the end of the year, said Dean McCarron, principal analyst at Mercury Research.

Prices haven't been confirmed, but they will likely be low. "If anything, it's Intel keeping up with AMD at this point," McCarron said.

While these price cuts are good for users because they lead to lower-cost PCs, the endless rounds of one-upsmanship are taking a toll on manufacturer's balance sheets.

AMD, for instance, is gaining market share but profits could remain elusive. AMD's chairman Jerry Sanders has said that AMD needs to get to the point where its processors have an average selling price of at least $100. McCarron, however, said that he estimates that AMD's current average selling price is around $80 to $90, the same place it was last quarter when AMD reported a financial loss.

Intel has not been spared either. The company is expected to report a rise in revenues for the third quarter compared to the second quarter and the same quarter a year ago. Earnings, however, will likely be less than they were a year ago, according to a consensus based on a poll of analysts on First Call. Intel will announce its earnings on October 13.

Others are not doing much better. National Semiconductor has reported consecutive financial losses this year and has said it will cut 1,400 workers. National also terminated a foundry agreement with IBM which will effectively force IBM to drop its own line of Intel clone chips.

"The low-end is a hotbed. Prices are dropping, margins are dropping, and they [National] have been getting hammered," said one source in the processor industry.