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Intel to cut chip prices up to 50%

Aggressive price cuts on Pentium processors next month should keep Intel well ensconced as the processor supplier to the world.

Aggressive, across-the-board price cuts on Intel (INTC) Pentium processors next month should keep Intel well ensconced as the processor supplier to the world.

The August cuts will slash the price of Pentium II and Pentium MMX processors by 10 to 50 percent. The Pentium II is Intel?s newest microprocessor, used mostly in expensive PCs and powerful workstation computers. The MMX Pentium is Intel's mainstay processor and the chip of choice in consumer and business PCs sold worldwide.

The 300-MHz version of the Pentium II will get the heftiest cut, falling from its current prohibitive pricing of more than $1,900 to a more reasonable $830, according to Southcoast Capital, an Austin, Texas-based marketing research firm. The 233-MHz Pentium MMX will also plummet from the high $500 range to $355 as of August 1 for computer vendors buying in large quantities.

Mainstream Pentium MMX chips will fall to around $160, while "classic" (non-MMX) chips will drop to below $100, Southcoast said. Only Pentium Pro processors will not be discounted.

The new pricing should allow major PC vendors to bring out consumer PCs in the $1,000-and-under price range with 166-MHz MMX Pentium processors and 200-MHz classic Pentiums, according to Ashok Kumar, an analyst at Southcoast.

At the high end, Pentium II systems with the 233-MHz version of the processor will fall into the $2,000 to $2,500 range, depending on the feature set.

The aggressive pricing won't make it easy for Intel's competitors Advanced Micro Devices and Cyrix, which have little to bring to the table aside from comparable chips at prices lower than Intel's, said Kumar.

Currently, both AMD and Cyrix offer dirt-cheap, low-end Intel-compatible processors, as well as competitively priced high-end chips.

With the new price cuts, Intel appears to be pulling the rug out from under any compelling strategy these companies may have to lure PC manufacturers away from Intel. But AMD is expected to make aggressive cuts of its own next month.

All of this slashing may slow down PC sales as buyers wait for the price cuts to percolate up from the chips to the systems themselves. "In the last few weeks of July we don't expect much in sales because of the price cuts," Kumar said. Afterward, he added, "you will see more richly figured computers at lower price points," which will drive demand.

One growth area will be machines priced less than $1,000, said Andy Neff, an analyst at Bear, Stearns. With the price cuts, Intel will be offering MMX chips which can likely find a home in sub-$1,000 PCs with a full set of features.

Intel is an investor in CNET: The Computer Network.

For the remainder the year, the company wants to position Pentium MMX chips as the processor of choice for entry-level computers and the Pentium II as the processor for midrange and high-end desktops.

Intel also remains committed to improving the Pentium II to enhance its value as a server chip. The company this week rolled out a Pentium II with technology making it more suitable for servers. Analysts also state that Intel will make the chip more scaleable, so that computer makers can out with servers with four or more processors.

The coming shift in its processor portfolio is reflected in the company's manufacturing plans. The Pentium II will likely expand from 25 percent of the unit mix in the fourth quarter of this year to 55 percent in 1998, according to reports from Southcoast. Manufacturing costs for Pentium IIs will also drop by as much as 35 percent in the second half of the year, providing more room for Intel to maneuver.

In terms of Intel sales overall, Kumar said that in the second quarter the year sales were up over the second quarter of 1996 although were weaker than sales from the previous quarter. With the price cuts, however, the second half of the year will likely turn out to be as strong as the first half of the year.

Interestingly enough, although Intel has to write off inventory of so-called classic Pentiums during the quarter, the stalwart chip proved to be one of the more popular in that period as users turned to increasingly cheaper computers, according to research from Computer Intelligence, "The No. 2-selling chip in the dealer channel for May was the 133-MHz Pentium," CI's Matt Sargent said.

Price Drops:

Pentium MMX

--233-MHz from $580 to $355.

--200-MHz from $470 to $235.

--166-MHz from $255 to $135.

Pentium II

--300-MHz from $1,981 to $830.

--266-MHz from $775 to $650.

--233-MHz from $636 to $520.

Pentium Pro: No changes.

Classic (Non-MMX) Pentium: Most will sell below $100.

Source : Southcoast Capital