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Intel price cuts to boost sales

In apparent anticipation, Hewlett-Packard drops prices on its Vectra line by up to 16 percent.

Price cuts on Intel processors slated for the end of the month are expected to prompt street-level price cuts on workstations and PCs in an already competitive market. One vendor, in fact, has already taken pricing action, apparently in anticipation of the cuts.

Hewlett Packard dropped prices on its Vectra line today by up to 16 percent, bringing the price of a Vectra VE with a 166-MHz Pentium MMX chip to $958. A Kayak workstation with a 300-MHz Pentium II, on the other end of the spectrum, is now $2,955.

"It's a very aggressive market," said Boris Elisman, marketing manager for PC workstations at HP.

While HP would not directly state whether its price cuts were related to any upcoming Intel cuts, Dave DuPont, product marketing manager at HP, said that further price actions weren't anticipated, suggesting that HP's actions presaged the forthcoming, highly publicized Intel cuts.

"It is our intent that these prices will endure for some time," he said, "Do I seen another round of price cuts in two weeks? No."

The HP cuts affect six Vectra models. Along with the models mentioned above, HP has cut the price on the Vectra VL with a 200-MHz Pentium MMX processor and 16MB of memory from $1,298 to $1,182 while the Vectra VL with a 233-MHz Pentium II and 32MB of memory has dropped from $1,925 to $1,621. Apparently, it didn't take HP much time to cut prices again on the Pentium II model: The Vectra VL with a 233-MHz was previously discounted to the $1,925 price on October 1.

In the Pentium II realm, the Kayak XA with a 233-MHz Pentium II and 32MB of memory drops from $2,516 to $2,149. The Kayak XA with a 300-MHz Pentium II and 64MB of memory sinks from $3,848 to $2,955. The Kayak line of workstations made its debut on September 9.

Price cuts this year have stemmed from a variety of factors. First, a number of the major vendors, including HP, have set out to aggressively grow market share, often through lower prices. HP, Compaq, and others have also streamlined their manufacturing and distribution operations to achieve lower costs. This too has translated to lower street prices.

Third, Intel has been aggressively cutting processor prices this year. The upcoming processor price cuts, slated to be put into effect on November 1, are expected to drop current processor prices from 9 to 22 percent for OEMs, according to Ashok Kumar, semiconductor analyst with Southcoast Capital.

Overall, Pentium II prices have dropped over 20 percent since the first quarter while Pentium MMX prices have dropped over 60 percent.

Prices for the Pentium II 266-MHz chip are expected to drop from $610 to $555 while the Pentium II 233-MHz will likely sink from $480 to $415, reductions of 9 percent and 14 percent respectively, according to Southcoast.

More severe declines will be seen in the Pentium MMX family. The 233-MHz version of the Pentium MMX processor will drop from $370 to $315, a decrease of 15 percent. The 200-MHz version of the chip will go from $255 to $199, a 22 percent decline, while the 166-MHz version will sink from $135 to $115, a 15 percent decline, said Southcoast.

Meanwhile, a classic Pentium chip running at 200 MHz will sink to $99, down from $115, while a 166-MHz version of the chip will drop to $89 from $99. All quoted prices are for OEMs buying in bulk.

On top of all these factors, many believe that the PC industry as a whole will begin to consolidate, which could further drop the bottom line for consumers.

"You will start to see some of the major players fall by the wayside," said DuPont. "You've seen people at the top gain market share and it is effecting the others."

Channel sources have further indicated that inventories have also inched up in the last quarter, a situation that may prompt discount sell-offs.

Mario Morales, semiconductor analyst at market researcher International Data Corporation, said that Intel's price cuts have been both more frequent and steeper than in year's past, a slippery slope in part due to Intel's desire to control a large portion of the emerging low-cost computer market.

"They are trying to transition their technology to the low end of the market. That is why you've seen the price erosion," he said. "On a long term basis it will impact their margins because they are going after lower margin products....It's not only the sub-$1000 computers. We might start seeing Windows CE devices take off and they are going to need low cost processors."

As the trend continues, Intel's best technology will emerge quicker in bargain basement products. Later in 1998, $1,200 Pentium II computers will be available in the consumer space.

Beyond pricing, Morales, among others, has postulated that Intel has also shortened the calendar for the release of certain technologies. Intel earlier this year started to manufacture chips on the .25 micron process, a chip manufacturing method which results in smaller, faster, more efficient processors.

The shift, however, was scheduled earlier to not occur until 1998, he said.