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New Pentium II, price cuts arrive

Intel will debut its second-generation "Deschutes" Pentium II today, while it cuts chip prices. PC makers are following suit with price reductions.

Intel (INTC) will debut its second-generation, "Deschutes" Pentium II today, while it cuts prices on its chips. Some computer manufacturers are reducing prices on systems also.

The release of the Deschutes Pentium II paves the way for personal computers that will reach a new level of high performance at the lowest price-performance points in PC history, reflecting a sea change in the industry's pricing structure.

The next Pentium II will cost less than $700 for large-volume purchasers, a low introductory price compared to past high-end Intel chips, mirroring the free-fall in chip and PC prices at other end of the market spectrum, where sub-$1,000 systems are becoming increasingly commonplace.

The 333-MHz Pentium II will cost about $722 in volumes of 1,000, according to Ashok Kumar, an analyst at Loewenbaum & Company. Computer vendors, however, will likely only pay $685 to $655 for the chip because of the larger volumes they purchase. Until recently, Intel introduced its fastest processors at prices typically over $1,000.

Prices will then drop about 20 percent later this year on this chip, according to Kumar.

This, not surprisingly, will engender machines at historically low prices for this lofty PC segment.

Intel is an investor in CNET: The Computer Network.

Gateway 2000 will release the GP-6, a full-featured PC aimed at small business users. Along with the 333-MHz Pentium II, the system will feature a 19-inch monitor, a 8.4GB hard disk drive, 64MB of memory, a CD-ROM drive, and Windows NT for $2,899. In the past, systems like this--the cream of the PC crop--have been introduced at prices exceeding $4,500, and more often $5,000.

Gateway is also cutting prices on some models up to 21 percent. Its Destination PC-TV convergence product will drop to a much more affordable level of $2,499, with a DVD drive. These fancy computers come with extra-large screens and a panoply of high-end features. To date, they have been priced out of the reach of most consumers, typically above $4,000.

The price reductions also have moved Gateway?s E-1000 business PCs for networked environments below $1,000, including monitor. For home buyers, Gateway has now has a fully configured Pentium II 266-MHz multi-media system under $2,000.

Compaq, meanwhile, is expected to hit new pricing lows for its high-end Pentium II consumer systems. The Presario model will come with a DVD drive, 48MB of memory, an 8GB hard drive, and a 56-kbps modem. It is expected to carry a suggested retail price of between $2,000 and $2,500. The No.1 PC vendor is also slated to come out with a Deskpro business PC with a 333-MHz Pentium II.

During the past year Intel has cut processor prices fairly steadily. Following the upcoming price cuts, for instance, the 300-MHz version of the chip will be selling in volume for $525, less than one-third of its original cost, while the 266-MHz version will sell for $375, according to Kumar.

The 233-MHz version is currently priced at $268. Prices will also come down on Pentium MMX processors.

Overall, the downward price slope for Pentium II is likely to continue in 1998, but Kumar, among others, believes that the company's margin on processor cores has so far remained relatively constant.

The 333-MHz chip is the first of the second-generation, Deschutes Pentium II processors from Intel. This generation will be made under the 0.25-micron process, which means that the circuits will be .25 microns thick. This will result in smaller, faster, and less expensive processors than those made under the current "fatter" 0.35-micron process.