Live: Samsung Unpacked Live Updates Apple HomePod 2 Review Apple Earnings Preview Resurrecting the Dodo COVID Emergency to Expire DOJ Eyes Tesla Self-Driving DC's 'Gods and Monsters' Slate Salami, Sausage Recalled
Want CNET to notify you of price drops and the latest stories?
No, thank you

Do PC vendors feel pressured to use Intel?

Analysts say Intel has a panoply of tactics to keep vendors loyal.

Against the backdrop of a Federal Trade Commission investigation Intel under scrutiny into Intel's (INTC) business practices, questions are surfacing about how the chipmaker keeps PC vendors wedded to its processors, and chip rivals Advanced Micro Devices (AMD) and Cyrix cut off from the lion?s share of the business.

Intel disclosed yesterday that the FTC is looking into whether Intel "has engaged, or is engaging in unfair or deceptive acting to monopolize, to attempt to monopolize, or otherwise restrict price or nonprice competition in the development or sale of microprocessors or other components or intellectual property," according to a subpoena served on Intel by the FTC.

Intel is an investor in CNET: The Computer Network.

In addition to the more apparent advantages such as a broad line of products, quality, supply, and performance, analysts say Intel has a panoply of tactics to keep vendors loyal. "The biggest carrot is that [PC manufacturers] get access to the newest [Intel] technology," said Richard F. Doherty, director of The Envisioneering Group, a marketing research firm based in Seaford, New York. "Don't buy the newest technology and you won't get anything in the future," according to Doherty.

But Doherty says this kind of tactic is "not unlike other companies" and Intel's methods do not deviate significantly from practices in other industries.

Advertising subsidies is another carrot. Intel has confirmed that it allocates hundreds of millions of dollars a year for Intel Inside advertising. The connection, not surprisingly, is that Intel subsidizes products that use Intel processors. "If 80 percent of the customer's product is Intel, then we subsidize that. If the other 20 percent isn't, then obviously we don't," said an Intel spokesperson.

The higher the value of the product, such as the Pentium II, the higher the percentage of "matching funds" for advertising, added the Intel spokesperson. Intel would not say what the percentage of matching funds is, however.

AMD and Cyrix simply don't have the pocketbooks to support this kind of program, and thereby can't embrace customers to the extent Intel can, according to analysts.

Intel Inside dollars flow most heavily to the largest PC manufacturer's such as Compaq, Gateway 2000, and Dell Computer.

Nevertheless, analysts polled by CNET don't find this practice irregular or unnecessarily predatory or monopolistic.

Doherty cites manufacturers such as Sony which also use "clever" stratagems that are not that dissimilar from Intel?s. Sony offers enticing monetary, yet not readily visible, incentives in the broadcast equipment business to ensure customers remain faithful, repeat buyers. As a result, it controls a large portion of this market.

He does believe, however, that Intel may be going beyond the pale of proper business practices with the Pentium II, Intel?s newest chip, since it is expected to lock out competition and thereby lock in PC manufacturers as customers to an even greater degree.

"AMD and Cyrix are getting attention from the FTC here," he says. The Pentium II architecture is an extremely complex design protected by trade secrets and practically impossible to copy, paving the way for less competition from AMD and Cyrix and increased Intel dominance in the PC industry in 1998 and beyond.

Charles Boucher, semiconductor analyst with UBS Securities, said that while Intel may be engaged in unsavory tactics, it is hard to document.

"Sure, there are probably concessions that have been made to huge customers to keep AMD out of certain accounts. Do I believe it is happening? Sure, but there is no objective evidence."

But Marketing researcher Mercury Research's Dean McCarron is more specific. He says Intel offers kits to customers that include components such as chipsets and motherboards (a motherboard is the main PC circuit board). "They give discounts on the motherboards and chipsets. Such large discounts [in some cases] that they might even appear to be free," he said. He added that once vendors get hooked on this, "it's a hard thing to give up."

Intel says that though it offers kits, it never sells below cost. "It doesn't make sense for our business. We understand the FTC rules and regulations which prohibit this," Intel said.

Boucher says that generally large customers receive lower prices, early allocation, and a greater portion of soft dollars. At the same time, all of these bonuses come plotted on a curve that increases awards with purchases. In other words, the rewards increase, but generally avoid preference, according to Boucher.

"They are very careful. They have told the investment community that they know they are under scrutiny," he adds.

Many observers, both PC vendors and analysts alike, believe that Intel?s ability to woo PC manufacturers is simply a function of its size and its corresponding ability to offer more to customers than AMD or Cyrix can. "First we bought just processors, then we bought chipsets, then motherboards. Intel is always getting a bigger piece of the pie. You don?t know where it?s going to end, " said John McEwan, president and CEO of the Technology Advancement Group of Chantilly, Virginia, a PC manufacturer that specializes in supplying server computers to the U.S. government, referring to the smorgasbord of components that he now purchases from Intel.

But McEwan believes that Intel has gone too far with the Pentium II. "The Pentium II is going to be anticompetitive. That is probably the crux of [the government's] anti-competition investigation," McEwan said.

On the sales front, he says tactics by certain Intel sales representatives have sometimes been blunt and forceful when offering technology to his company. "They say 'it's our way or the highway.'"

Analysts say that this type of pressure can also be applied to PC manufacturers in order to dissuade them from using processors from competitors. "It is possible that some rogue salespeople are applying pressure to customers that use non-Intel processors, " said Martin Reynolds, an analyst at Dataquest. Be he adds, "Note that this is entirely different from a friendly call from Andy Grove suggesting that Intel processors are a better deal," which probably happens more often.

Back to intro