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For Dell, the "Pentium II is dead"

The PC maker is proclaiming the death of Intel's Pentium II processor while it sings the praises of the low-cost Celeron chip and heads into the sub-$l,000 market with its usual gusto.

Dell is proclaiming the death of Intel's Pentium II processor while it sings the praises of the low-cost Celeron chip as it heads into the sub-$l,000 market with its usual gusto.

Carl Everett, senior vice president in charge of personal systems at Dell says there is such as small delta between the two chips that its demise is a foregone conclusion. "You only have a two to four percent difference in performance between Pentium II and the Celeron. It's very nominal," he said today in an interview.

"The Pentium II is dead," he said. The Pentium II still appears in many models from all major computer vendors including desktops, notebooks, and some servers and workstations. But Everett's sentiment also reflects statements--though not quite as direct--from Intel executives in the past. Paul Otellini, general manager of the Intel Architecture Group, has said that phasing out of the Pentium II fits in with its overall plan for the Celeron chip.

Everett, who was once a senior executive at Intel, also believes the chip giant's new strategy is unprecedented. "Traditionally, a new Intel chip like the Pentium III would make its way down to the low end?but we don't believe this will happen," said Everett in an interview today.

The Celeron is "coming up" to penetrate markets that a high-end Intel chip would usually percolate down into overtime, he said. "We think the Pentium III will never make it into [the low end] market," he said.

Dell is now gearing up to marshal all of its manufacturing and marketing strengths to enter in the sub-$1,000 market in force, he said. The Celeron technology, along with Intel's upcoming Whitney chipset, which integrates a graphics processor, will allow "desktops to get much smaller and eminently more serviceable," he said.

Everett said these future compact desktops from Dell would be small enough that add-ons would not be handled through the PC's space-hogging internal expansion slots, as it is done traditionally, but via Universal Serial Bus connections on the back of the PC.

Everett added that Dell's "segmentation strategy" calls for Pentium III processors to be used in higher-end markets such as "broadband Internet with 3D graphics" and the Pentium III Xeon for segments that need, for example, "multi-threaded apps," referring to the ability to run a number of software programs at once.

As Dell and Intel move quickly to establish Celeron and Pentium III as the mainstay chips for the foreseeable future, this may be setting up Pentium II-based systems for fire sales in the coming months as PC manufacturers try to sell off inventory.

"You might see a lot of Pentium II systems moving into the sub-$1,000 market and be tempted to say, 'Hey, now Intel is targeting Pentium II at the sub-$1,000 market.' But this isn't true. These will really just be fire sales," said an industry source familiar with Dell's strategy.

This Celeron-Pentium III strategy may also help Intel maintain profit margins. In the past, price cuts on low-end chips lead to price cuts on higher-end chips, which diluted profits overall. By separating these products into two segments, low end price cuts do not necessarily, or as directly, affect high end processor prices, according to several analysts and Intel executives.

Nathan Brookwood, an analyst at Insight 64, said that the introduction of the Pentium III will help Intel better define differences between its low-end Celeron line, the current Pentium II, and the premium-priced Pentium IIIs. "At least you can show people that there are things that you can do with a Pentium III that you can't do with a Pentium II," he said.

Of course, Dell will be challenged to make a profit in a market that has caused major profit headaches--and considerable losses in some cases--for PC makers.

Dell's move into consumer largely comes as a result of the Web, said Kurt King, PC analyst at NationsBanc Montgomery Securities. By selling more PCs on line, Dell is able to cut its costs dramatically and therefore make a profit on these machines. Before, a PC maker could build market share and revenue, but not turn a magnificent profit, he said.

"You build your top line, but you dilute profitability," he said. Dell actually has been growing units in the consumer market at 80 percent in year to year comparisons, faster than Gateway. Nonetheless, Dell's consumer market share is half of what it is in business PCs.