Intel fuels the fire with Celeron cuts

In a move that will likely rattle the PC and chip markets, Intel is cutting prices on its increasingly popular Celeron line of chips. But some analysts think if Intel continues to sell more of these low-priced chips, as it battles with Advanced Micro Devices (AMD) in the consumer PC market, revenues could suffer. In short, as Intel boosts Celeron shipments, the overall average selling price of Intel chips dips.

AMD also cut chip prices today. (See related story.)

Prices fell between 11 to 24 percent on Intel's Celeron line with prices ranging from $63 to $133 in volume. Interestingly, only the 400-MHz Celeron sells for more than $100 which was, roughly, a cut-off point for the company in the past. And now only one desktop Celeron chip sells for above $100 in volume.

Pentium II prices are slated to be cut on February 28 when the Pentium III arrives, Intel has said.

Ominously, Intel may also begin to see chip competition seep into its bastion of business PCs, according to Matt Sargent of ZD MarketIntelligence. According to a survey, though the vast majority--almost 70 percent--of U.S. workplace sites indicated that they would continue to purchase Intel, the remaining 30 percent indicated that they either had no brand preference of the processor that came with their PCs or didn't know what brand they would consider. "This indicates that to a significant portion of workplace users, the Intel brand is not important," says Sargent.

This may presage an opening, albeit small, for both AMD and Cyrix. "That opening may come in the area of price pressure," he added.

Linely Gwennap, editor director of the Microprocessor Report, believes that Intel could be setting itself up for a revenue shortfall if buying trends don't pan out as Intel is forecasting.

"If only 10 percent of its sales shift from [the high end] Pentium II to Celeron, Intel will lose more than $1 billion in 1999 revenue due to the lower prices of the Celeron," according to Gwennap, writing in the most recent edition of the newsletter.

Gwennap adds that this would happen only if buyers of Pentium II-based systems, mostly in the corporate market, start snapping up Celeron-based systems instead.

"There is no doubt that Intel has ignited a price war [with the Celeron] " he added.

Intel doesn't agree. "I'm somewhat confounded by this," said Intel spokesperson Manny Vera. "Yes, we are getting aggressive with Celeron...then people assume there is a price war. But that [the Celeron chip line] is just a small chunk of our business."

Intel also takes issue with the potential revenue shortfall. Intel CFO Andy Bryant gave some "guidance" recently in a meeting for financial analysts where he asserted that profit margins for 1999 are expected to be 57 percent, up 3 percent from 1998.

Intel is counting on strong revenue from high-end processors such as the upcoming Pentium III processor and its Xeon line of workstation and server chips. Intel's chips for notebook PCs, in some cases, also sell at a premium. Intel also says that it is cheaper to make Celeron chips and therefore it doesn't take that big of a hit on profit margins.

Despite what Intel says though, the low end of the market has all the hallmarks of a price war. AMD chips, for example, are expected to go for as little as $40 in March, almost unprecedented in the Intel-compatible chip market. AMD sells most of its chip to makers of low-end consumer PCs.

Ashok Kumar, an analyst at Piper Jaffray, predicted that the price of K6-2s sold to PC makers in March will be about $40 for the 333-MHz version and range well above $60 for the 400-MHz processor.

Other analysts say AMD's cuts won't be so severe. Tad La Fountain, semiconductor analyst for Needham & Company, disputed that such severe price erosion will happen.

"AMD's CFO told me this evening that the ASPs for the quarter were likely to come in at about the same level as the fourth quarter--$89," he said Thursday.

Currently, Intel's lowest priced Celeron lists for $71. The popular 333-MHz version is priced at $90. The 400-MHz version, which is expected to be a hit, is priced at $158. A 433-MHz Celeron chip is due in March, said sources, while a 466-MHz version will come out in May with a 500-MHz chip to follow.

This puts most, if not all, the Celeron chips inside systems in the sub-$1,000 PC segment. Models based on the 333-MHz chip, such as those from emachines, are already below $700.

Kumar expects that Celeron chips will comprise about 25 percent of the Intel "product mix" in the first quarter of 1999. "If there was a sudden shift in this mix, it would impact the bottom line," he said. Though he doesn't expect the scenario that Gwennap postulates.

Chip dealers "confused"
Meanwhile, resellers and chip dealers report that Intel has been more tight-lipped about processor pricing this year than in the past. Before, dealers would get price lists weeks or even months in advance. Now, most get the new price lists right before, or on the day of, the price cuts.

"We're more confused than ever. They keep changing things on us," said one source. "They are not being very up front on pricing for the faster chips."

Competition seems to be at the heart of the shift, said one source. In the past, Intel could dictate the price of chips and therefore could map out pricing. Now, with a smaller market share in the low end, Intel finds it has to adjust prices according to circumstances, which makes the price less predictable.

And, although the company still does not have a lot of competition in the performance arena, price cuts in the low end of the market effect the high end. High end Pentium IIs, for example, can't be much more expensive than Celeron processors because the performance gap between the two lines has shrunk.