Pentium III price cuts likely to presage PC discounts

The price cuts, which went into effect yesterday, fell mostly in the 20 percent range. The 733-MHz Pentium III, for instance, dropped 21 percent, from $754 to $594, in volume quantities, while the 650-MHz dropped from $562 to $423, a 25 percent discount.

AMD, meanwhile, followed with cuts up to 31 percent on the Athlon family and cuts above 50 percent on its mobile line, said a spokeswoman. Discounts on PCs will likely follow.

A year ago, the two companies were beating each other up over price cuts in the budget processor segment, where AMD sold most of its chips. But in the middle of 1999, AMD came out with Athlon, which competes more closely with Intel's Pentium III. Since then, the rivals, conveniently located one freeway exit from one another in Silicon Valley, have been attacking each other by accelerating the clock speeds of their fastest chips and simultaneously cutting prices.

Today's price cuts are fairly typical, said Kevin Krewell, senior analyst at MicroDesign Resources. However, more aggressive cuts are expected in the near future because Intel will be producing more chips and making up lower prices through volume sales and even faster processors. Intel is currently holding a conference with its sales and marketing executives in San Francisco.

"When we get to the second quarter, it is going to get worse, because Intel will have a boatload of products out there," Krewell said. "Then you are going to see some serious fights."

How deep the cuts go will be anyone's guess. Some analysts have theorized that Intel can't cut Pentium III prices too drastically because it would hurt profit margins. Last year's price war in the low end was largely subsidized by the more expensive Pentium III. Intel has also been saddled with chip shortages, because it has been releasing processors with less volume than in the past.

Nonetheless, Intel is a long way from the bottom line. The Pentium III costs approximately $39 to make, package and test, according to estimates from MicroDesign Resources.

Meanwhile, AMD has been gaining market share and design wins with Athlon. The company also posted its first quarterly profit in a year last week. On the other hand, Intel price cuts have been known to turn one-quarter victories into massive losses for AMD.

"It is not in Intel's interest to collapse prices," said AMD chief executive Jerry Sanders in a conference call last week. Sanders, however, cautioned that continued profitability would depend on the pricing situation.

Among other cuts, the 700-MHz Pentium III was dropped 23 percent, going from $733 to $562, while the 667-MHz version dropped 23 percent, from $583 to $449. At the low end, the 500-MHz Pentium III went from $229 to $193.

There were no cuts on the 800-MHz Pentium III, which came out late last month, for $851. All prices are volume, wholesale prices. Actual retail prices will likely be higher.

Intel also cut prices on its latest Pentium III Xeon chips. These processors, the first Pentium III processors in the Xeon family, have to date not cut a huge swath in the marketplace, especially in comparison to the earlier Pentium II Xeons. Only a few major computer manufacturers have picked them up, although it is increasingly being adopted. More powerful versions that will be more popular will arrive later in the year.

The 733-MHz Pentium III Xeon went from $804 to $644, a 20 percent drop, while the 667-MHz version dropped 21 percent to go from $633 to $449.

For its part, AMD cut the 750-MHz and 700-MHz Athlons 14 percent, dropping them, respectively, from $799 to $689 and $699 to $519. The 650-MHz Athlon dropped 25 percent from $519 to $389, and the 600 MHz went from $419 to $289, or 31 percent.

The biggest cuts came in the mobile sector. The 475-MHz K6-2 fell 48 percent from $209 to $108 while the 450-MHz K6-2 shrunk 54 percent from $189 to $86. The 433-Mhz dropped 52 percent, from $159 to $75.