Tech Industry

Pentium 4 cuts escalate chip price war

Intel will dramatically cut prices on the Pentium 4 this month to stimulate demand for its new chip, as the processor market gets even uglier.

Intel will dramatically cut prices on the Pentium 4 this month to stimulate demand for its new chip, as the processor market gets even uglier.

The Santa Clara, Calif.-based chipmaker will slash Pentium 4 prices by as much as 50 percent this month in two cuts coming Sunday and April 29, industry sources said. As reported earlier, the company also will introduce a 1.7GHz Pentium 4 on April 23.

The cuts will potentially fill a number of strategic goals. The company has already said it wants the Pentium 4 to displace the Pentium III on desktops by the end of the year. Demand is also slow, and rival Advanced Micro Devices continues to gain ground.

The depth of the cuts, however, poses huge problems, according to some analysts. The Pentium 4 is a fairly large chip and expensive to make. Intel also continues to give PC makers rebates for each computer that includes Rambus memory and, for now, Pentium 4 systems work only with Rambus memory.

All of these factors combined with discounts will have a major effect on the company's bottom line.

"It is going to have a catastrophic impact on gross margins," said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray. "You're not going to see any seasonal pickup in demand," he added

Intel is scheduled to report first-quarter earnings Tuesday, and analysts expect glum news of slowing sales and canceled orders.

Cuts come with the territory
The discounts to some degree are inevitable. Large distributors and computer manufacturers have been dumping chips onto the gray, or secondary, market, according to several analysts and dealers. As a result, Intel has to reduce wholesale prices to stimulate demand.

An Intel spokesman would not comment on either price move, citing the company's earnings quiet period. However, he did say it behooves Intel to establish Pentium 4 in the mainstream market.

"We're continuing on our plan to bring Pentium 4 system prices into mainstream price points," said spokesman Seth Walker. "One way to bring computer buyers into to lower the bill of materials cost," therefore lowering overall Pentium 4 PC prices.

Currently, Pentium 4 systems are priced as low as about $1,200. However, the company has said it wants to see those prices fall to $999, including a monitor, by the fourth quarter.

Meanwhile, Pentium III will continue its run in notebooks and low-end servers for some time. But Intel plans to phase it out of the desktop market by the end of the year, Anand Chandrasekher, vice president of microprocessor marketing at Intel, said in a recent interview.

The proliferation of the Pentium 4 through price cuts could put extra pressure on AMD because of the magic of megahertz marketing, said Kevin Krewell, an analyst with MicroDesign Resources.

By the numbers
Although megahertz is only one measure of processor performance, the number, which indicates the speed of a chip's internal clock, is one of the most important figures for determining price.

AMD's Athlon tops out at 1.3GHz, with a 1.4GHz version expected later this quarter. By contrast, Intel has a 1.5GHz version of the Pentium 4 and will have a 1.7GHz chip this month.

At an equal clock speed, the Athlon outperforms the Pentium 4 on many functions, according to many analysts. In fact, many tests show a 1.2GHz Athlon outperforming the 1.5GHz Pentium 4. But this doesn't help AMD, which must price its chips by megahertz, forcing the ostensibly superior Athlon to sell at the lower price, Krewell said.

"AMD is forced into a frequency matchup with Intel, which is beneficial to Intel," he said. Krewell said the looming price cuts are "very similar to what Intel did with the Pentium and (AMD's) K-5."

AMD took a stealth price cut last week and will cut prices again Sunday.

AMD price cuts are typically deeper than the official announcements suggest because of extra discounts the company grants to large computer manufacturers when they buy in large quantities.

Going gray
This can sometimes backfire, allowing many chips to end up in the gray market when the large PC makers or distributors unload excess chip inventories at the end of a given quarter.

Gray market activity has picked up in recent months, according to several analysts and dealers, thanks to an oversupply of processors.

"The infiltration of the gray market has gotten worse and worse," said Roland Baker, president of Fremont, Calif., computer seller Net Express.

This isn't a problem for AMD alone. It's a rare occurrence, but many of Intel's Pentium 4 chips are selling at retail for less than Intel's advertised wholesale prices.

"When you see steeply discounted products, someone other than Intel is taking a hit," said Dean McCarron, principal analyst at Mercury Research. "The gray market grows in times of short supply or oversupply. In times of oversupply, you have the (computer makers) dumping their inventory. In the shortage situation, the same thing happens because they can make more by selling the chip."