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Xeon, Intel price cuts due

Intel will release its first Xeon Pentium II processors this month, while price cuts are slated for Monday.

Intel will release its first Xeon Pentium II processors for servers and workstations this month, while it cuts prices on its desktop processors next week.

The chip giant also is expected to cut prices Monday on its Celeron processors targeted for use in basic and performance PCs, as it moves to reduce prices more frequently in a sluggish PC market, analysts said.

A spokesman for the Santa Clara, California, company declined to comment on impending price cuts, but he said Intel is now cutting prices more frequently as part of its segmentation strategy. Processor prices, in fact, already are falling. A chip oversupply has led to current retail prices that are below posted wholesale prices.

"Because we have all these products going into new segments, we can?t do price adjustments one time during the quarter like we used to do," the Intel spokesman added. Analysts predict price cuts ranging from 15 to 20 percent.

"It's to maintain a competitive edge, given how fast things are moving at the low end of the market," said Michael Feibus, a principal at Mercury Research.

Intel Pentium II price cuts
Speed Current* June July
400 MHz $770 $675 $550
350 MHz $575 $485 $395
333 MHz $460 $385 $295
300 MHz $350 $285 $195
266 MHz $230 $185 $185
233 MHz $185 $185 $185
Source: Piper Jaffray
* Estimate of current wholesale price. Official price is higher. Actual price varies.

At this low end--which Intel calls the "basic" PC market, where personal computers cost less than $1,200--Intel plans to launch a faster version of its Celeron chip. (Intel is an investor in CNET: The Computer Network.)

A new Celeron, running at speeds of 300 MHz, will be launched Monday. The first Celeron, launched in mid-April, runs at 266 MHz. Intel also is expected to cut the price on the first Celeron by about 32 percent, analysts added.

Intel was late to enter the market for low-cost PCs with a specific product line. The sub-$1,000 PC market has been one of the fastest-growing markets, and prices continue to fall.

Just last week, privately held Packard Bell NEC launched a fully featured PC priced just below $700 without a monitor, designed around a processor from Intel rival National Semiconductor?s Cyrix unit.

"This is the first time the company has made a price cut in the last month of the quarter," said Ashok Kumar, a Piper Jaffray analyst, who noted that the frequency of price cuts has increased to synchronize with the number of product updates.

Meanwhile, later this month, the powerful Xeon Pentium II line will make its debut. The first Xeon chips to be released will run at 400 MHz, and will contain extra high-speed memory to increase the performance of the chips. The cheapest Xeon will cost $1,050 and contain 512KB of secondary cache memory, according to Ashok Kumar, semiconductor analyst at Piper Jaffray. Other sources put the price slightly higher.

Intel will follow this release with a Xeon chip containing twice as much high-speed memory for over $4,400, said sources, and subsequently put out 450-MHz versions of the chip in September.

The special high-speed memory is called "cache" memory. Less-expensive versions of the Xeon chips will come with either 512K or 1MB of memory. The priciest chips will come with 2MB of memory.

While the chip will not be officially released for PC Expo, which starts June 16, server vendors including IBM will preview their plans for adopting the new chip.

The chip's pricing is a key aspect of Xeon because Intel should be able to recoup some of the lower margins it is now seeing on its Pentium and Pentium II chips, while also enabling PC vendors to design fast, high-end server computers with price tags ranging above $20,000 for the most powerful systems.

Workstations using these chips won't be cheap either. These are expected to fall into a range between $5,000 and $10,000, and some could go higher.

Because Xeon chips will be priced substantially more than Pentium II chips,gross margins that have been battered by the rise of sub-$1,000 PCs will be shored up.

The chipmaker's gross margins during the first quarter shrank from above 60 percent in 1997 to 54 percent in 1998, while the average selling price (ASP) for processors similarly also went down. The declines partially owe to cheap computers, according to Intel.

Although increased manufacturing costs contribute to the price hike, market positioning appears to be the controlling factor. In the desktop arena, where the company faces more competition, the latest Pentium II-based processors are priced between $145 to $770 and discounted quarterly. In the server arena, where Intel faces virtually no competition from other x86 processor vendors, Pentium Pro chips from an earlier generation of technology sell for $1,035 and $2,675 and are rarely discounted.

"The server market isn't as price sensitive as the desktop market," Dataquest analyst Nathan Brookwood noted in an earlier NEWS.COM interview. "If you cut the processor price, you don't really change the dynamics of the [server] market."

Xeon chips are more expensive to manufacture because the processors will come in a "Slot 2" package, which is approximately twice as large as the current "Slot 1" package used for desktops. Intel will also use pricey, custom-made memory chips for the cache memory. Standard Pentium II chips use memory bought on the open market.

The Xeon strategy will also allow Intel to cash in on the rise of Intel-based workstations and servers, according to Drew Peck at Cowen & Company. Until now, Intel charged a single price for processors running at a particular speed, regardless of where the chip fit into a PC vendor's lineup, he pointed out. Compaq Computer, for example, pays the same price for desktop Pentium II chips as it does for Pentium IIs that end up in more costly and profitable servers.

By branding Xeon as a separate product line, Intel can price these chips without regard to the desktop prices and take a portion of the incremental profit associated with these more expensive machines.

"In the face of unprecedented price erosion, Dell has seen its average selling price for [computers] rise. A big part of it can be attributed to workstations and servers," Peck said by way of example. "Intel has so far not been able to exploit this. Xeon is an effort by Intel to cash in on [this marketing strategy]," he added.

Meanwhile, the release will be accompanied by desktop price cuts for the third quarter. Pentium II prices in volume will now range from $185 for a 266-MHz Pentium II to $675 for a 400-MHz Pentium II, said Kumar. While customers will not get to pay these prices directly, they will experience overall lower system prices as a result of the cuts. Advanced Micro Devices will probably follow the price cuts as well.

Reuters contributed to this report.