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Tough times for Cyrix?

Its competitors are catching up in the low-cost computer chip market, a market Cyrix and Compaq virtually invented a year ago.

Despite the news of a patent settlement with rival Intel, Cyrix's day in the sun may be over: Its competitors are catching up in the low-cost computer chip market, a business Cyrix and Compaq Computer virtually invented a year ago.

Cyrix processors helped power the rise of the market for PCs priced less than $1,000, playing a key role when Compaq introduced an ultra-low-cost Cyrix-based consumer box back in February of 1997. Since then, the market has grown leaps and bounds, led by a series of new Compaq consumer models using Cyrix processors.

But after a brief gestation period, Intel and (INTC) and Advanced Micro Devices (AMD) have gotten low-cost religion and are flooding the market with their own cheap processors.

The trend bodes ill for National Semiconductor, which purchased Cyrix in July of last year. Just yesterday, National said sales of Intel-compatible processors are expected to decline in the third quarter and would represent a drag on earnings.

Cyrix suffered probably its biggest blow in January of this year when Compaq announced several new low-end desktop computers using the AMD K6 processor, but none with the Cyrix chip. Compaq did elect to use a Cyrix MediaGX chip in a Presario notebook PC, but the No.1 PC maker effectively pushed Cyrix off the desktop lineup, according to Michael Slater, founder of the Microprocessor Report.

And the worst isn't over yet. Intel was asleep at the wheel when the market for cheap PCs opened up, but the chip giant has managed to get its processors into an increasing number of low-cost systems by aggressively lowering prices on its Pentium chips. Moreover, later this year the company will introduce a stripped-down version of the high-end Pentium II processor, code-named Covington--again increasing pressure on Cyrix to come up with a comparable chip.

All of this begs the question: Where does Cyrix go from here?

One direction may be toward the high end, analysts say, and that's where the today's settlement comes in. Under the deal, National and Intel settled a patent infringement lawsuit and extended a broad cross-licensing agreement that will allow Cyrix to duplicate the Pentium II. (See related story)

"I think they will go for the high end with [the Pentium II]," said Richard Belgard, a semiconductor industry analyst at the Microprocessor Report.

The company could decide to make Pentium II-compatible chips for use in high-performance, low-cost systems. Or it could produce chips for use in powerful server and workstation computers, a market Intel is already targeting with upcoming revisions to the Pentium II.

Cyrix could also tap into an internal supply of chips--a first for the company--since National recently started manufacturing Cyrix 6x86 processors on the most advanced "0.25" micron process out of its pilot manufacturing plant in Santa Clara, California.

Steve Tobak, vice president of corporate marketing at National Semiconductor, says Cyrix's problems with Compaq are temporary and stem from an inability to produce enough 233-MHz MediaGX chips.

"It's not because they didn't like the processor. We failed to execute," he said. Compaq continues to use the MediaGX in a notebook model, Tobak pointed out, adding that Cyrix is in discussion with other PC makers.