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Problems delay Merced chip

Intel's first 64-bit processor will be delayed about six months because of manufacturing problems.

Merced, the next-generation processor from Intel, will be delayed about six months, a blow to workstation and server makers such as Hewlett-Packard that are betting heavily on the chip.

The delay is a result of manufacturing problems rather than a problem with the 64-bit chip's design, Intel announced Friday. With the delay, the release of Merced will not occur until 2000. Originally, the chip was scheduled to appear in late 1999.

"[Intel] severely underestimated the complexity of the chip," said an industry source familiar with the setback.

The source added that the fundamental design of the chip is complete but that going from "design to actual product" means there are "hundreds of elements that need to be scheduled." These include laying out the circuits and validating software to run on the processor, the source said.

Merced is chip giant's first 64-bit microprocessor and the company's first product for servers that will compete directly with comparable systems from Sun Microsystems and Digital Equipment. While the slip does not pose dangers to the eventual release of Merced, the effects of the postponement will ripple through the computing industry. The six-month delay will stall Intel's entry into the high-end corporate segment.

Moreover, the rescheduling means that Intel will have to wait to recoup from razor-thin profit margins on low-cost chips. The explosion of the sub-$1,000 PC sector has altered the economics of the computer marketplace so that high-end sales are crucial in making up for marginal profits on the low end.

News of the delay sent the company's stock downward. (Intel is an investor in CNET: The Computer Network.)

Until Merced is released, Intel will have to rely on Xeon processors, which are based around a 32-bit Pentium II core, for a high-end offering. Xeon chips, which debut later this month, will sell for between $1,125 and $4,500 and carry high margins. Still, Merced chips are expected to carry even a higher margin.

PC makers such as Hewlett-Packard, Compaq Computer, and Dell Computer that had been planning powerful, high-profit-margin 64-bit systems for the end of 1999 will similarly have to delay their products. This could cause corporate buyers to slow down their buying plans, which will mean an overall slowdown in the market.

"You will see a slowdown in buying in customer anticipation in Merced," said Amir Ahari, server analyst at International Data Corporation. "It will slow down the 'enterprise' market a little bit."

In the so-called enterprise, or corporate, market, buying typically slows down on the eve of a major upgrade, Ahari said. Sales of Pentium Pro servers, for instance, have slowed in the past two to three quarters in anticipation of servers based around the forthcoming "Slot 2" Xeon processors from Intel.

This ordinary lag will thus likely be extended for an additional period of time as a result of the delay, he said.

Of the individual vendors, HP may lose the most, said Dean McCarron, principal analyst at Mercury Research. Not only is it one of the codesigners of Merced, but the company is also basing its server strategy around the chip. Early next year, HP will come out with another version of its PA-RISC processor, which has been the basis of its high-end Unix server strategy, but it does not have a clear road map for PA-RISC chips beyond that.

"If your entire future product strategy is Merced, it screws you up for a few quarters. If it's incremental, it's not as big a deal," he said.

HP denied the assertion that its enterprise strategy is dependent upon Merced. Although HP will eventually standardize on Merced, the company will continue to improve its PA-RISC chips for the next few years, and make these chips available to customers at least beyond 2002, said Jim Carlson, marketing maker for IA-64 systems at HP.

HP will come out with a new version of its Unix chip, called the PA-8500, later this year or early next year and then follow that fairly quickly with the 8700.

On the other hand, companies like Sun and Compaq, which recently acquired Digital, could benefit because its 64-bit products will not have to compete against Merced until later. Microsoft, meanwhile, is preparing a 64-bit version of Windows NT to run on Merced.

Intel chief executive Craig Barrett said the delay was unfortunate, but one that would not have serious consequences on Intel's overall competitive position.

"If I were to label the issue, it's one of program management and getting all the bits and pieces pulled together in the right order," Barrett said. "We are still very hot on the technology...I don't think a six-month slip is a major impact from a product standpoint."

Barrett pointed out that Merced is only the first in a line of at least three processors and that the two follow-on chips have not slipped in their schedules.

The next generation of Merced, which is code-named McKinley, is due in around 2001, said sources. Although vendors will support the first generation of the chip, most observers and a number of Intel executives have said that the 64-bit effort will really kick into high gear with this second generation.

Reuters contributed to this report.