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Intel gets serious about low-cost chips

Intel readies its Pentium II for sub-$1,000 PCs, signaling that the chip giant is finally serious about this burgeoning market.

Intel (INTC) will release its Pentium II for sub-$1,000 consumer PCs in April, turning up the heat in the low-cost chip market, currently a three-way slugfest between Intel, Advanced Micro Devices, and Cyrix.

The chip, code-named Covington, is a "cacheless" Pentium II processor, meaning that Intel has eliminated the extra, pricey memory currently built into Pentium II chips. One of the first vendors to adopt the chip will be Compaq.

Covington, which is due in April, will be the first of the low-cost Pentium IIs promised by Intel, according to John Joseph, semiconductor analyst with Montgomery Securities. To date, the Pentium II has been found only in mid-range and high-end PCs.

Compaq will release a desktop PC using a Covington chip by early summer. The computer will contain a 4GB hard drive, 32MB of memory, and cost between $700 and $800, Joseph detailed.

Intel's newest and fastest low-cost entry will boost its presence in an emerging market where, untypically, Advanced Micro Devices and Cyrix have taken the lead in price-performance.

To date, Intel has brought out no unique processors for the sub-$1,000 PC market and, in this sense, virtually ignored this segment. This will be the first Intel processor built specifically for low-cost PCs, signaling that the chip giant will no longer be merely a follower.

The chip will initially run at 266 MHz and be targeted at the "retail market," said industry sources familiar with the rollout.

But analysts are raising questions about the chip's performance. Though it will be the lowest cost Pentium II to date, it will also be crippled by the lack of critical high-speed cache memory. "I suspect it's going to turn out that it's comparable to the existing [high-end] Pentium chip [in performance]," said Dean McCarron, a principal at Mercury Research, a marketing research firm in Scottsdale, Arizona.

The extra cache memory plays an important role in speeding up the Pentium II processor.

McCarron adds, however, that this is all part of the plan to move Intel's entire line of chips over to the Pentium II architecture by the second half. Therefore it is not surprising that replacing the venerable Pentium processor at the low end will be low-end, low-performance Pentium IIs.

The Pentium II will also have certain inherent advantages over the Pentium, including faster performance on operations called floating point--used for multimedia and engineering applications--and better MMX performance, according to an Intel spokesperson.

The chip will sell for approximately $100 to $115, said Joseph, about 70 percent less than the current cost of a 266-MHz Pentium II. Most of the cost reductions will be made by removing the onboard "level-2" cache memory on the chip. Although lacking this cache memory, Covington will continue to use the "Slot 1" architecture featured on other Pentium II chips.

"We used to call it Pentium II junior," he said. "They reduced the price to bring the part down into the sub-$1,000 area."

Actual manufacturing costs will be around $40 dollars, he added.

Other Pentium II processors to be announced at that time include 350- and 400-MHz versions of the Deschutes processors, first introduced on Monday of this week. (See related story)

Joseph further added that Pentium II demand has increased due to aggressive price cuts by the company. Late last year, demand for systems using the processor were both below his own expectations and likely Intel's, Joseph said. However, recent price cuts have stimulated sales.

"Demand for Pentium II is really beginning to take off now that Intel has cut the price," he said. Computer vendors have also said that demand for the processor has ramped up in the past month. An Intel spokesperson confirmed the code name of the chip.