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Pentium II oversupply eroding prices

An ample supply of Pentium II has lead to unprecedented prices for high-end systems from both major manufacturers and second-tier vendors, as Intel prepares faster Pentium II chips.

Pentium II computer prices are dropping fast, and the chip's price may be too. Meanwhile, Intel is preparing to bring out faster Pentium II processors next year.

An ample supply of Intel Pentium II processors--especially Pentium II chips running at 233 MHz and 266 MHz--has led to unprecedented prices for high-end systems from both major manufacturers and second-tier vendors.

CompUSA, for instance, is currently advertising an American Pro (CompUSA's house brand computer) with a 266-MHz Pentium II, 32MB of memory, a 3.5GB hard drive, CD-ROM drive, and a 14-inch monitor for $1,999.

Soon, Intel will be drastically cutting its Pentium II pricing for large customers. At least two large Intel customers will begin to pay less than $300 for 233-MHz Pentium II chips on their January orders, said Drew Peck, semiconductor analyst with Cowen and Company.

"My view is that the Pentium II is not meeting Intel's expectations as far as demand is concerned," he said.

Intel will follow this with across-the-board price cuts of up to 25 percent in Feburary.

The 233-MHz Pentium II will sell for $300, a 25 percent drop from its current price of $401. The 266-MHz version of the chip will drop to $401 from its current price of $530, a 25 percent discount. The 300-MHz version will drop from $738 to $562, a 23 percent discount.

In Feburary, Intel will also unveil the 400-MHz Pentium II for a price of $998.

Peck emphasized that Intel is really battling customer indifference more than competitors. Advanced Micro Devices, he pointed out, is still having difficulties producing 233-MHz chips.

"The Pentium II does not dramatically improve the performance for consumers," he said, "so they are forced to use price as a lever."

"There is chip capacity and there is a fairly ample flow of product," said Daniel Kunstler, technology analyst at J. P. Morgan Securities. "You can call up anybody and get a fairly good price."

Price cuts have mostly been seen in computers with the 233-MHz and 266-MHz Pentium II chips, Kunstler said, but recently price erosion has reached 300-MHz models.

"They [300-MHz systems] had been in short supply, but I've noticed some aggressive pricing for the 300-MHz line," he said.

NEC Computer Systems is offering a PowerMate Pro with a 300-MHz Pentium II that sells for $2,358. The PowerMate Pro266 comes with a 266-MHz Pentium II, 32MB of memory, a 4.3GB, and 15-inch monitor for $2,299. A PowerMate ENT, one step lower on the NEC food chain, with a 233-MHz Pentium II, 32MB of memory, and no monitor, sells for $1,749.

Online retailer CDW is offering a Compaq Deskpro 2000 with a 233-MHz Pentium II processor, 32MB of memory, and a 2.1MB hard drive for $1,599 without monitor. A Deskpro 2000 with a 266-MHz Pentium II, 32MB of memory, and a 3.2MB hard drive goes for $2,057. An IBM PC 300XL with a 266-MHz Pentium II sells for $2,046.

"There are plenty of them [233-MHz and 266-MHz processors]," commented Richard Belgard, a consultant with MicroDesign Resources. Belgard himself recently bought a 266-MHz Pentium II system for $1,999.

Officially, the 233-MHz Pentium II sells for $401 in quantities of 1,000. The 266-MHz model sells for $530 and the 300-MHz version sells for $738 in quantities of 1,000.

Chuck Mulloy, an Intel spokesperson, said that Intel does not discuss prices or specific transactions with computer OEMs. The prices listed above were established on October 26 after a round of price cuts. Computer vendors get discounts when buying in larger volumes; a computer maker buying thousands or hundreds of thousands of chips will likely pay less for chips than the prices stated above.

These prices may also be coming as a result of cost savings resulting from "build-to-order" strategies. Under build to order manufacturing, costs, especially costs associated with short term credit, get cut because manufacturers don't have to carry much inventory. Compaq, CompUSA, and NEC unveiled build-to-order strategies earlier this year.

Intel's revenues are expected to inch up only slightly during the quarter, while gross margins are expected to remain flat or grow slightly, Mulloy added. The flatness is due primarily to a shift among vendors to "build-to-order" strategies.

With build-to-order, computer vendors buy fewer chips up front, Mulloy explained. Revenues will be relatively flat in this quarter because vendors are still shifting from the inventory model, where they buy large amount of chips up front, to the build-to-order mode.