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Intel's graphics chip pricing: fair or foul?

The latest debate over the character of the chipmaker's business dealings centers on its foray into the graphics chip business.

Is Intel coercive or not? The latest debate over the character of the chipmaker's business dealings centers on its foray into the graphics chip business.

On Monday, the Federal Trade Commission filed See special coverage: Intel in a vise an action against the Santa Clara, California-based company for unfair business practices. But specific examples of misconduct, especially allegedly predatory pricing, more often than not prove elusive, according to analysts.

A case in point is the controversy surrounding the pricing on the i740, the graphics chip the company first issued earlier this year.

The i740 is currently selling for between $7 to $18 in wholesale markets in Taiwan, far below Intel's posted volume price of $28. One marketing research firm, 4th Wave, has said Intel is "dumping" the chip to gain market share.

"We saw a correlation between Pentium II and the i740" on motherboards, said John Latta, president of 4th Wave. Prices board makers paid for the chip varied widely, but at least one motherboard vendor told Latta that it was easier to get Pentium II chips if the vendor bought i740s.

The i740 is also enjoying a sudden surge in popularity. Approximately 45 companies showcased 59 boards containing an i740 chip at Computex, a Taipei trade show, actually displaying their wares inside the Intel booth, Latta said.

"Why are we seeing such a volume of parts in the Asian market?" he asked.

Others claim the explanation is more complicated. Two Taiwanese distributors are getting rid of their excess supplies of Intel graphics chips by bundling the chip with sales of Pentium IIs and 440BX chipsets, said Jon Peddie, president of Jon Peddie Associates, a Tiburon-based consultancy.

These distributors are charging board makers $8 for the i740 in a Pentium II bundle. In turn, the chip is resold to other "add-in" card makers for $18. Distributors, who pay a price in the mid-$20s for the i740, lose money on the chip but pick up the margin with the processor.

Accusations of dumping can also be partly explained by a worldwide surfeit in the market for this class of chips that began in March, said Peter Glaskowsky, graphics chip analyst for MicroDesign Resources. "Everybody's got this inventory," he said. Besides, although the price exceeds the manufacturing costs of others, it is likely well in excess of Intel's manufacturing costs because the company has already amortized its plant costs, he added.

"The cost of making an additional i740 is well below $10," he said. "They [Intel] can afford to sell them for very low prices."

An Intel spokesman said that the company is not selling the chip anywhere near the Taiwanese prices. At best, the chip sells for slight discounts off of the $28 price. (Intel is an investor in CNET: The Computer Network.)

Still others have speculated that Intel is knowingly allowing this gray market to thrive to gain market share. Pressure, according to one source, is being applied to U.S. computer vendors to adopt the chip.

Peddie added that at least two U.S. computer vendors plan to release i740-based computers this fall. Glaskowsky further added that Intel is aggressively ramping up use of the chip. Intel has close to 50 to 60 partnerships with board makers.