New Intel chip drives prices lower

A cavalcade of low-cost PCs based around the new "integrated" Celeron processor coming Monday, combined with an oversupply of older Celeron machines, will likely lead to fire sale prices on current boxes.

Celeron is Intel's chip for the low-cost PC market. Integrated and non-integrated refer to the inclusion or absence of critical high-speed memory on the chip. While Celeron-based PCs sell for $850 to $1,100 today, $500 and $600 prices will probably begin to appear.

Bargains are also likely to appear on Pentium II systems running at speeds up to 333 MHz. Because these systems will compete with the $1,000- to $1,100-Celeron systems coming Monday, vendors and resellers will likely drop prices to clear out inventories quickly. Pentium II systems from Digital and Toshiba are already selling for $799 through electronic resellers and more could follow.

"Eight hundred dollars seems to be the step-down price," said Scott Miller, PC analyst at Dataquest. "I would expect everybody in this business wants to get their inventory out there."

Vendors typically cut prices on current computers when new, succeeding models come to market. The price cuts on systems based around the original 266-MHz and 300-MHz Celeron chips, however, could be particularly deep. Analysts and reviewers panned the chip when it arrived this past spring. Few customers flocked to the new computers. Inventories mounted.

"The new Celeron processors are a lot better...and there are a lot of savvy buyers who decided to skip (the first Celeron systems)," said Roger Kay, an analyst at International Data Corporation.

The problem with the original Celerons revolves around the arcane topic of secondary cache memories. Cache memory essentially serves as a data reservoir for the processor. Standard Pentium II chips contain a secondary cache of 512K of memory that sits alongside the processor.

The new 300-MHz and 333-MHz Celeron processors contain 128K of memory integrated onto the same silicon as the processor, a grafting technique that will substantially boost the performance of those chips.

The original 266-MHz and 300-MHz Celeron chips, however, contain no secondary cache. As a result, their performance was equal to, and even less than, the performance of older Pentium MMX chips running at the same or lower speeds, according to various analysts. A 266-MHz Celeron was often compared to a 233-MHz Pentium MMX chip.

The Celeron's substandard performance, however, was only one obstacle facing the chip. The first Celeron computers came out at a time when the market was flush with cheaper Pentium MMX machines, as well as a fleet of new machines based around processors from Advanced Micro Devices.

The first 266-MHz Celeron systems debuted April 15 around $1,199. In the same week, IBM, Hewlett-Packard, and Compaq Computer released 200-MHz and 233-MHz Pentium MMX machines for $799 and $899.

"These were better and there were cheaper," Kay noted. In fact, these systems still are cheaper. Microwarehouse is offering a 166-MHz MMX Compaq Deskpro for $499.

"There were a lot of values for customers at that time," said Michael Takemura, product marketing manager for desktops at Compaq. "Do I get the sub $800 Pentium MMX product or the 266-MHz Celeron?"

Whatever the cause, sales didn't hop. A number of dealers contacted by CNET News.Com said that they decided to pass on the first Celeron machines. Those dealers admitted sales have been slow. Representatives at CompuTown and CompUsa outlets in the San Francisco area said they have sold few.

"You are going to see people selling these systems for $499 and $599 in retail," said Brian Kushner, CEO of Recompute. Recompute specializes in remanufactured, or refurbished, computers. Part of Kushner's job involves evaluating retail PC pricing. "It is a question of where the right sweet spot at the market is," Kushner said, adding: "No one really seems to really want the Celeron systems without cache."

Dataquest's Miller predicted prices closer to $600. Although dealers will be strongly motivated to get rid of their existing Celeron systems, most PC makers never shipped that many. In the second quarter, only 203,000 Celeron systems emerged from factories out of a total of 7.6 million computers.

Still, Miller said, "the ones that are out there will probably be pretty heavily discounted."

(Intel is an investor in CNET: The Computer Network.)