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Intel chip glut may bring holiday cheer to PC buyers

Extra Intel inventory bought by PC makers and a push by AMD could drive prices down, according to analysts.

It should be a jolly Christmas for PC buyers, because an excess of chips will likely lead to discounts, according to analysts.

An excess supply of Intel processors purchased this summer, combined with , could lead to price cuts of as much as 10 percent on computers over the next three months.

Is the mainstream market going to see that $100 PC that everyone has been talking about? Not quite yet, said Current Analysis senior analyst Toni Duboise. "All I can say is, watch the promotions... what you will see are extremely aggressive prices."

Potentially, the situation could lead to promotional prices of $199 for entry-level desktops with an Intel Celeron or AMD Sempron processor, 256MB of RAM, a hard drive with at least 40GB, and Windows Home Edition in the package. The PC would also be bundled with a 17-inch CRT display and, possibly, a printer, Duboise said. Approximately 18 percent of the desktops selling at retail at this moment are priced at less than $500 after rebate, she added.

"Where the inventory glut is more likely to play a role is in the mid-to-high-end space, where manufacturers have a little more wiggle room to drop prices and simply take a reduction in profit margin rather than a loss in the value space," she said.

Laptop prices are also expected to decrease, Duboise said, noting that retailers started advertising notebooks with Intel's Celeron mobile processors at promotional prices of $499 last year. And these days, a sub-$1,000 notebook with Intel's higher-end Centrino processor is more the norm than the exception.

While there was a 12 percent drop in the average selling price of a mainstream desktop PC, from $735 in the summer of 2004 to $647 in the summer of 2005, PC makers are expected to be more selective about their baseline prices and draw people in with promotional offers.

Midrange and high-end desktops and notebook PCs would have even more wiggle room, according to Duboise, meaning that mainstream PCs with Intel's Pentium 4 or AMD's Athlon 64 chip, 512 RAM and 80GB or 100GB hard drive could see price drops of 10 percent to about $583. Entry-level Media Center PCs with integrated graphics cards from ATI Technologies could also see price reductions, from $599 to $539, the analyst said.

Not including mail-in rebates, the average selling price for a mainstream desktop PC sold by a bricks-and-mortar retailer (offering brands such as Hewlett-Packard, Gateway and Sony) was about $719 in September 2005, according to Current Analysis. The average Athlon 64 system retailed for about $633, well under the $845 average price for a desktop equipped with a Pentium 4 with Hyper-Threading, a performance-enhancing feature that helps a processor compute multiple tasks. Desktop computers with a Celeron D chip came in with the lowest prices, with an average price tag of $446.

One of the most expensive components of a computer is the processor. Average list prices for mainstream chips range from $100 to $200, depending on their configuration. Intel sells direct to computer manufacturers--purchase prices are negotiated in advance, are significantly below list and not subject to huge price swings.

Dell, which uses Intel chips exclusively, has offered a rapid series of price cuts in the last 12 months, including those for desktop PCs, which are priced as low as $299, and for laptops, which sell for about $499.

The AMD factor
A recent push by AMD to sell its Athlon 64 and Turion processors could also prompt additional price cuts by Intel or PC makers in the next three months, analysts said.

AMD hit a milestone when desktops equipped with its Athlon processors accounted for 52 percent of all desktops sold in retail outlets in the U.S. during the back-to-school selling season, according to Current Analysis statistics. The 64-bit Turion mobile chip also is moving well.

"It takes about seven to nine months to see how successful a chip is selling in the market," In-Stat principal analyst Jim McGregor said. "From a time a product has gotten out, computer makers need to test the chip and then there is a period of time where it needs to get used by the public. Well, for AMD, it's been nine months, and Turion is doing well."

Intel is expected to launch price cuts on its Pentium Extreme processors and other chips in January, according to a confidential Intel road map seen by CNET News.com. The document did not specify any expected price cuts in the months of October, November or December, which are big selling seasons for PC makers although generally not as robust for chipmakers.

Too much stock
So why is there an inventory glut? Partly because Intel chipset shortages that the company reported this summer forced PC manufacturers to start stockpiling in order to prepare for the holiday shopping season, Duboise said.

"The oversupply was likely in Pentium 4 processors while the shortages were in Celeron chipsets and probably mobile," added independent PC-industry analyst Roger Kay.

Some of its customers overbought in July, August and September, the Santa Clara, Calif.-based company said during its quarterly earnings report on Tuesday. Intel's chief financial officer, Andy Bryant, said the overbought inventory included "Intel architecture" silicon and that the cost to computer makers--$100 million--equaled about two days' worth of shipments.

"It's up to PC makers to move the stuff, and they may lose money by holding onto them too long, particularly if the parts are marooned on the island of obsolescence by a new generation."
--Roger Kay, independent PC-industry analyst

The terms "shortage" and "oversupply" refer to two different situations. In a shortage, computer makers are asking for product beyond their allocation and the chipmaker can't supply it. Manufacturers sit with a dead PC chassis if they've already got the other system components, or just unfilled orders if they don't. The latter would be the case with Dell, which builds PCs to fit each order.

In oversupply, computer makers buy beyond their initial build plan, asking for extra parts. If Intel has the product on hand, it ships. If orders for computers never materialize, the computer makers are left with the parts, which they can move next quarter. They then build systems with parts they have rather than cut new orders to Intel.

"While computer makers can order their desktop chipsets from other vendors, the only concern would be on the mobile side, especially if you were a manufacturer that wanted to use the Centrino brand," said In-Stat principal analyst Jim McGregor. Intel's Centrino is a specific combination of a Pentium mobile chip and Intel's wireless LAN technology used in laptops and other mobile devices.

Nonetheless, because PC makers stocked up on chips in the past three months, they now are looking to use them to fill orders for new machines. Discounts are the normal method for getting rid of these chips. And to help PC makers keep their profit margins, Intel will provide "price protection"--that is, cut current prices to keep their own sales up, and then retroactively give discounts on chips bought earlier.

Dell spokesman Jess Blackburn said many factors influence Dell's pricing, noting that the company is "not going to speculate on what we might be doing over the course of the next quarter." PC makers Hewlett-Packard, Lenovo, Gateway, Toshiba and Sony did not immediately respond to requests for comment.

"Bottom line--no one wants to be caught without product during the holiday shopping season," Duboise said.

And there is no guarantee that Intel will cut prices on chips in computer makers' inventories retroactively, Kay said.

"It's up to PC makers to move the stuff, and they may lose money by holding onto them too long, particularly if the parts are marooned on the island of obsolescence by a new generation," Kay said.