Problems delay Merced chip

Merced, the 64-bit processor from Intel, will be delayed about six months, a major blow to workstation and server makers such as Hewlett-Packard that are betting heavily on the chip.

The delay appears to be the result of a manufacturing problem, rather than a problem with the chip's design, according to Dean McCarron, principal analyst at Mercury Research. Intel has told people that the company "is trying to get a better handle on the manufacturing process," he said.

With the delay, the release of Merced will not occur until 2000. Originally, the chip was scheduled to appear in late 1999.

"It's a very complex [chip]. [Intel] sheerly underestimated the complexity of the chip," said an industry source familiar with the setback.

The source added that the fundamental design of the chip is complete but that going from "fundamental design to actual product" means there are "hundreds of elements that need to scheduled." These include laying out the circuits and validating software to run on the processor, the source said.

The source also confirmed that PC vendors were not pleased. "Nobody likes a slip."

The postponement will stall Intel's entry into high-end corporate computing. Merced is Intel's first 64-bit microprocessor and the company's first product that will be incorporated in servers that will be competing directly with comparable systems from Sun Microsystems and Digital Equipment.

The impact on PC vendors such as Compaq, Hewlett-Packard, and Dell Computer which had been planning powerful, high-profit-margin 64-bit systems for the end of 1999 is not yet clear. Counterbalancing the Merced setback is the fact that Intel's next-generation Xeon Pentium II chip, due within the next two weeks, will allow Intel to sell high-margin chips and PC vendors to sell powerful, pricey workstations and servers in 1999 and beyond. New versions of the Xeon and other next-generation 32-bit chips should also extend this pricing model.

But it could cause companies to slow down their buying plans, which will mean an overall slowdown in the market.

"You will see a slowdown in buying in customer anticipation in Merced," said Amir Ahari, server analyst at International Data Corporation. "It will slow down the 'enterprise' market a little bit."

Corporate--or so-called "enterprise" market--buying typically slows down on the eve of a major upgrade, Ahari said. Sales of Pentium Pro servers, for instance, have slowed in the past two to three quarters in anticipation of servers based around the upcoming "Slot 2" Xeon processors from Intel.

This ordinary lag will thus likely be extended for an additional period of time as a result of the delay, he said.

Of the individual vendors, McCarron theorized that HP may stand to lose the most. Not only is it one of the co-designers of Merced, but the company is also basing its server strategy around the chip. Early next year, HP will come out with another version of its PA-RISC processor, which has been the basis of its high-end Unix server strategy, but it does not have a clear roadmap for PA-RISC chips beyond that.

"If your entire future product strategy is Merced, it screws you up for a few quarters. If it's incremental, it's not as big a deal," he said.

News of the delay sent the company's stock downward from its closing price in after-hours trading. Intel was trading at 70-1/2 in after-hours activity, after closing down 2-1/16 at 71-7/16. (Intel is an investor in CNET: The Computer Network.)

Reuters contributed to this report.