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AMD undercuts Intel pricing 25%

Advanced Micro Devices cuts prices on some of its K6 chips over 40 percent as the processor price war escalates.

Advanced Micro Devices (AMD) cut prices on its K6 chips over 40 percent today as the processor price war escalates with Intel (INTC).

Confirming an earlier report by CNET's NEWS.COM, AMD announced today that it is reducing prices on its K6 processors. The new prices will maintain about a 25 percent price advantage over Intel, even after the new price cuts it announced today. (See related story)

The 233-MHz K6 processor is now priced at $289, the 200-MHz model at $189, and the 166-MHz chip at $109, each in 1,000-unit quantities, AMD said in a statement today.

The 166-MHz K6 has more than a $130 price advantage over an equivalent 166-MHz MMX Pentium. The 233-MHz K6 is about $240 cheaper than the 233-MHz Pentium II and about $95 less than the 233-MHz MMX Pentium. The 200-MHz K6 chip beats Intel Pentium MMX pricing by about $63.

This kind of chip pricing differential is typically manifested in systems that are $200 to $400 less than comparable Intel systems.

The K6, which offers performance that is faster than MMX Pentiums and on par with lower-speed Pentium II processors from Intel, was introduced back in April amid much AMD chest-thumping. "We believe we can do 30 percent of the unit volume of the Windows-compatible processor market," said AMD chairman and CEO W.J. Sanders III at the time.

But the challenges AMD faces are formidable if it wants to take 30 percent of the Windows-compatible market, analysts say. With Intel supplying more than 85 percent of a market that should approach 100 million units in 1997, AMD and Cyrix will scrap over the remainder. AMD should take about 6 or 7 percent of the market this year and possibly 10 or 12 percent next year when the market is projected at about 120 million units.

AMD is being hampered in its competitive battle with Intel by two factors: economies of scale, which gives Intel plenty of leeway for making drastic price cuts, and brand name.

"I expect AMD to maintain its 25 percent price advantage on Intel, but that's going to really impact their margins," said Mario Morales, manager of semiconductor research at International Data Corporation.

Further, the drop in Intel prices makes it incrementally more difficult for the company to land a major computer manufacturer. Intel MMX chips will likely be in sub-$1,000 computers by the fall, analysts said.

"A lot of people are looking at [the K6]. The issue isn?t just price, but also availability. Sometimes you don't get the product you need if you are not Compaq Computer (CPQ)," Kurt King, an analyst at Montgomery Securities, said in a recent interview. "But [alternatives] become less appealing every time Intel cuts prices."

"They have to look at these manufacturers who want an alternative to Intel in certain markets, but it's not going to get easier," said Daniel Kunstler, senior equity analyst at J.P. Morgan Securities.

So far, Digital Equipment (DEC), Fujitsu, Acer, and Vobis, are using the K6. Hewlett-Packard is expected to add a K6 Vectra in the near future, Morales said.

But brand name, backed by Intel's significant financial wherewithal, also creates a deterrent--unfair some claim--to both buyers and PC manufacturers. Intel, according to some estimates, has earmarked as much as $1 billion this year for "Intel Inside" advertising. This is money essentially allocated to customers such as Compaq, Dell Computer, and Gateway 2000 for advertising their products along with a prominent display of the Intel Inside logo.

This is a major disincentive for PC manufacturers considering a competing processor from AMD. Some industry sources say it is stated, in no uncertain terms, that PC manufacturers within the Intel Inside campaign will not stray from the Intel fold to AMD. Intel denies this.

Brand name extends beyond the U.S. The pressure that comes from trying to meet Intel on price in the domestic market makes overseas markets a logical focus for AMD. A number of the K6 processors, in fact, go to clone manufacturers in Taiwan and Korea, according to Brian Matas, a market research analyst at Integrated Circuit Engineering, an analyst firm in Scottsdale, Ariz.

That, however, throws AMD up against the Intel brand name again. Even overseas, it remains a tough sell. "Cost can be a factor in Europe and the Far East, but people in Indonesia see what is selling in the U.S. [and want the same thing]," Matas said. "There is a perceived intangible when it comes to Intel. It's more than price. People question, 'Is the performance as good? Is the company as good?'"