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Intel cuts prices, side deals

Intel will sharply cut prices and likely give special deals on high-end chips to clear the path for new processors.

With the world awash in an excess of desktop computers, Intel (INTC) will sharply cut prices over the next two quarters and likely give special deals on high-end chips to its major partners in a effort to clear the path for new products.

The semiconductor giant kicked off a new season of price

Upcoming Intel chip pricing
MHz Feb/Mar May
Pentium II
450 upcoming $750 (July)
400 upcoming $800
350 upcoming $609
333 $722-$583 $483
300 $530 $368
266 $375 $242
233 $268 $194
upcoming $152-$104
Pentium MMX
233 $135 $100
200 $100 $100
166 $95 below $100
reductions yesterday when it reduced the volume price of its 333-MHz Pentium II from $722 to $583.

Additional price cuts are also coming in May on other Pentium II chips, according to industry sources familiar with the next round of price reductions (see chart). In April, Intel is also expected to announce new speed grades for the Pentium II, including 350-MHz and 400-MHz versions with prices in the $610 and $810 range respectively. A 450-MHz version is expected later in July, according to industry vendors.

Intel will also introduce the Celeron Pentium II for sub-$1,000 PCs at price points as low as $104, according to industry sources. Other existing chips will get price cuts. The 300-MHz version of the Pentium II, for example, will fall from $530 to $368.

Intel has historically cut prices on processors every quarter to stimulate demand for existing product lines and make way for newer, faster processors. Quarterly price cuts by PCs makers have typically followed.

The frequency and degree of PC price cuts appears to be accelerating, however, because of a surfeit of desktops. The surplus has lead to an oversupply in processors and exacerbated the already-swamped memory chip market, sources say.

As a result, if computer makers can't get rid of their goods now, there will be less demand for the next generation of Pentium II processors, scheduled to debut in the next few months. The scenario plays out against a backdrop of increasingly compressed product cycles, which drives down the price of high-end computers with the newest technology to levels unheard of before.

Although this will weaken profits for PC makers, consumers will enjoy lower prices. The amount of money needed to buy an average 266-MHz Pentium II system now, for instance, will buy a 300-MHz Pentium II system in the next few months.

As evidence of this hyper-aggressive reduction, IBM has chopped prices dramatically on its 266-MHz Pentium II business systems, as sold through certain large resellers. An IBM 300GL desktop has been reduced to less than $1,200 at Computer Discount Warehouse, a major reseller.

This 266-MHz box was selling at close to $1,800 only a few weeks earlier, according to a CDW representative, and represents a new low for a machine considered a top-of-the-line system just one month ago.

Similarly, at Insight Direct, Compaq Computer is selling a Deskpro 2000 with a 233-MHz Pentium II and a monitor for $1,329, making the system the equivalent of a $1,000 offering without a monitor. The price presages a new wave of sub-$1,000 Pentium II systems.

Through the same reseller, Compaq is also offering a 166-MHz Pentium MMX Presario with a 2.1GB hard drive and CD-ROM drive for $699.

Prices on Pentium MMX-powered computers will continue to descend. IBM and Compaq will soon release PCs under $800 using 200-MHz Pentium MMX systems. Computers in this category now sell for around $900 domestically.

Intel will also likely cut individual deals with major manufacturers to clear high-end processor inventories, said sources in the computer resale business. Special deals essentially stimulate demand while preserving margins for the participating PC maker. If handled properly, it can be more efficient than across-the-board cuts on lower-end processors.

"They will probably cut deals on the side," added C.B. Lee, an analyst with Sutro & Company in San Francisco.

The situation results from supply outpacing demand. Though demand for computers grew last year and continues to increase, PC companies are making more systems than can be absorbed by buyers. Demand for low-cost systems has also sapped much of the margin out of the average computer, forcing manufacturers to try to make up the profit loss through even more volume.

"Basically, what you have is an over-inventory at the PC vendors," Lee said.

Evidence of the excess can be seen in component markets, he added. Spot market prices for processors, for instance, have been below contract pricing for the entire quarter. Spot markets handle surplus volume and typically offer lower prices than contract markets only when too much inventory exists.

Similarly, DRAM (dynamic random access memory) chipmakers started to try to cut deals with computer companies to clear inventories earlier than usual this quarter, but with less-than-spectacular success.

"The end-of-quarter madness started a little earlier this year," he said.

Intel is an investor in CNET: The Computer Network.