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Pricey chips to sustain Intel profits

Upcoming high-end Pentium II chips represent more than a redesign. They are a way for Intel to raise prices and continue to drive its high margins.

Upcoming high-end Pentium II chips represent more than a technical redesign. They are a way for Intel (INTC) to raise prices and continue to drive its high margins.

Future "Deschutes" Pentium II chips based on the Slot 2 design will range in price from $1,200 to almost $2,000 in volume, with the most powerful chips in the line possibly approaching $3,000 at the time of release.

These high prices will allow Intel to offset the extreme price pressure it is under at the low end of the PC market, as buyers increasingly snap up low-cost computers, typically below $1,000. These low-end boxes use processors costing as little as $95, sometimes even less.

While some of the manufacturing costs involved in making Slot 2 chips justify the higher price tag, these processors will certainly enjoy higher margins than their desktop equivalents. Current Pentium II chips range in price from $268 to $722.

Intel will also likely offer sales tie-ins with upcoming chip sets, main circuit boards, and graphics chips to bolster overall sales of all products, according to Ashok Kumar, an analyst with Loewenbaum & Company.

Slot 2 refers to the packaging and interface that will be part and parcel of Pentium II chips for workstations and servers. The Slot 1 package, introduced with the Pentium II, is the sleek, black casing that is synonymous with the look and feel of the Pentium II. (Slot 1 is featured in most of Intel's current TV ads.) A 400-MHz line of Slot 2 chips will debut midyear, followed by a 450-MHz version at the end of the year.

Intel is an investor in CNET: The Computer Network.

Early indications show that the Slot 2 package will be huge--about twice the size of Slot 1 packages. Intel flashed a photograph of the insides of the Pentium II package last week at the International Solid-State Circuits Conference in San Francisco.

Most of the size difference seems to come as a result of the additional high-speed memory that will come with these high-end Pentium II chips. These processors will come with up to 2MB of custom-made "cache" memory, or up to four times the memory of current Pentium II processors. Cache memory is used to keep the processor fed with data, since the processor operates more quickly than main memory.

The additional memory and new packaging will add substantially to the bottom-line costs of making the chip. But this will also give the company competitive options. The question now is which way the pendulum will swing.

"Some of these will be high-priced," said Dataquest analyst Nathan Brookwood, who predicted that the 450-MHz Slot 2 with 2MB of cache memory could initially be priced in the $2,000 to $3,000 range. Other less powerful Slot 2 configurations would sell for less.

These chips could also descend in price slower than their desktop counterparts because processor makers are under less cost pressure from computer vendors.

"The server market isn't as price sensitive as the desktop market," Brookwood noted. "If you cut the processor price, you don't really change the dynamics of the market."

History in some ways reflects this dynamic. The Pentium Pro, Intel's high-end server chip, still sells for as high as $2,600 in quantities. It has not been discounted as heavily as Pentium II chips.

Kumar, by contrast, believes the prices for these chips will be lower to fuel acceptance of Slot 2. The 400-MHz Slot 2 Pentium II with 1MB of memory, a product due midyear, will likely be listed at $1,200 in volume quantities but will actually sell for less. The same 400-MHz Pentium II chip with 2MB of memory will sell for more, but less than $2,000.

Kumar further added that Intel will try to target Merced, Intel's upcoming 64-bit chip, at close to $1,000. As a result, initial Slot 2 prices will have to stay closer to the $1,000 to $2,000 range.

Jim Turley, analyst at the Microprocessor Report, said that the initial price for these chips will be high but then descend after a few months to garner volume sales.

Mario Morales, semiconductor analyst at International Data Corporation, said that the Slot 2 processors will probably roll out at under $2,000.