Pentium II set-top under $400?

Slow to recognize the sub-$1,000 PC market, the chip giant will aggressively attack the market for inexpensive TV set-top boxes with a new line of low-cost Celeron processors, a company executive said today. In the fall of 1999, computer makers will begin to ship $399 set-top boxes based around an Intel Celeron processor, predicted Mike Aymar, vice president and general manager of Intel's consumer products group.

The revelation highlights the challenges the company faces as chief operating officer Craig Barrett takes over as CEO. Intel must learn to cope with lower margins and the popularity of low-cost computers or risk losing its seemingly unassailable position as an industry superpower.

Already, Intel failed in its first stab at incorporating its chips in digital set-top boxes from General Instrument (GI). General Instrument last year won an agreement to supply 12 large cable companies (including TCI) with up to 15 million new digital set-top boxes; those boxes will use a MIPS processor from Quantum Effect Design, as previously reported by CNET's NEWS.COM.

"They were bidding for the set-top box market. [But] even though they didn't get in on round one, I'm sure they will get in during later rounds," said Ashok Kumar, a financial analyst with Piper Jaffrey. Intel will be making chips on the .18 and .25 micron process by that time, and they will have efficient enough operations to address lower price points, Kumar noted. By making chips on smaller processes, more chips per wafer can be manufactured.

The demand for Intel processors among set-top box manufacturers remains unclear. Many RISC processors popular in current set-top models sell for $50 in volume, and some are even less expensive. Aymar said Celeron chips will sell for less than $100.

The $399 boxes envisioned by Aymar will be capable of running digital TVs and basic software applications and connecting to the Internet. More advanced versions of set-top boxes with DVD drives will retail for $599 and $999, he said.

"From $399 and up, they will all be a Celeron processor," Aymar revealed. "All the Celerons will be based on the P6 microarchitecture until the next generation. We are not going to go backwards and we are not going to rename the Pentium MMX." The P6 architecture is the underlying design for the Pentium Pro, Pentium II, and Celeron processors.

Toward the end of 1999, car manufacturers will also begin to debut "auto PC" systems, which will be based around a cross between Pentium II processors and either Celeron or StrongARM chips, he said.

But while the three-tiered set-top plan fills a gap in Intel's strategy, moving into the low-cost segment will change its business plan and likely reduce gross margins. Low-cost chips carry less marginal profit than processors incorporated into desktops or servers. (Intel is an investor in CNET: The Computer Network.)

Current Pentium II chips sell for between $268 and $583, according to various sources. The first Celeron chip, due out next month, will start at $153.

As it continues to reduce Celeron's price, Intel plans to make up the difference in margin through volume. But Aymar acknowledged that the shift changes the company's historical business model.

"We expect to be a 50 percent gross margin company, plus or minus" a few percentage points, he said.

Intel's decision to use its high-end Pentium II core chip in its set-top strategy stems from the Web's requirements for processors, Aymar noted. Sites that will run Microsoft's upcoming Chrome technology, for example, require the viewer to use a 350-MHz Pentium II at a minimum. By "going backward," computer vendors could not give this functionality to consumers. Chrome is a 3D technology that makes it easier for designers to build 3D versions of Web sites.

Faster, more advanced processors also allow Intel to shift more of the functions to software. DVD, audio, and other functions will be able to run off the processor and not require an additional chip. Other functions, such as 3D graphics, will be moved to the chipset, other Intel executives said. Intel will likely avoid integrating more functions in the main microprocessor itself.

Analysts have said that the Pentium II generates more heat than comparable RISC processors. Aymar countered by stating that computer vendors can design around the heat issue by using heat sinks. And, if heat is still a concern, vendors can adopt low-powered, albeit more expensive, versions of the Pentium II.

The three types of set-top boxes will differ by their capabilities. The $399 version will mostly exist to give access to digital TV and provide Internet connections. The more enhanced set-top units, which will sell for $599 to $699, will include DVD drives and include some additional PC functionality.

The $999 versions will essentially function like normal desktop computers.

These boxes will likely be compatible with the Windows CE operating system, though the slimmed-down operating software it will not necessarily be the only operating system used.

Technologically, set-top boxes do not present a great challenge, he said. The most difficult part will be in garnering acceptance from the public and content providers.

"The big challenge is how do we move TV watching from a passive experience to an active experience," he said. Publishers also have to be convinced "that their content is not going to be compromised," he added.