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Pentium II: Dynamo or dud?

As the chip's price drops, opinions are diverging.

LAS VEGAS--Depending on your point of view, the Intel Pentium II processor represents either the future of computing or a placeholder.

While major computer manufacturers are increasingly building their latest computer models around the processor, Intel's competitors and observers contend that the Pentium II, which was released in April, does not drastically improve desktop performance. Critics say that the first-generation Pentium II, referred to as the "Slot 1" architecture, does not run Windows 95 applications that much faster than high-end Pentium MMX processors, among other problems.

Meanwhile, Wall Street analysts say that current pricing trends indicate the Pentium II is not selling as well as expected. Intel cut prices in October, and the chipmaking giant will further reduce costs for some customers in January, in advance of across-the-board cuts to 25 percent in February, as reported by CNET's NEWS.COM last Friday.

"The Pentium II does not dramatically improve the performance for consumers. So they are forced to use price as a lever," said Drew Peck, semiconductor analyst with Cowen and Company, to CNET's NEWS.COM in a telephone interview last week.

Unsurprisingly, Advanced Micro Devices CEO and chairman Jerry Sanders goes further. Sanders believes that the Slot 1 Pentium II design is mostly form and little substance.

"Slot 1 has limitations," he boomed. "Slot 2," the next-generation Pentium II design, will cure some of these problems when released in the middle of next year. But this chip will be focused on workstations and servers, not desktops. "With Slot 2 things start to happen...but it's a smoke screen for now," Sanders said.

"If AMD can make enough K6s, you will see a slowing of the growth of Slot 1," he predicted.

Consumers too seem to sense not all is right with the Pentium II. The surprisingly early October cuts, coupled with planned price cuts in January and February, demonstrate less-than-feverish demand, say analysts. Also, Intel is releasing a version of the Pentium II without built-in secondary L2 cache, which potentially nullifies one of the major advantages the Slot 1 architecture but increases the chip's appeal to price-conscious PC buyers.

But major PC vendors like Dell Computer wholeheartedly disagree. Moreover, all major computer vendors are adopting the chip, with no sign of a slow-down.

Besides, say Intel supporters, the alternatives aren't great.

"The problem is that these guys [AMD, Cyrix] always come in at the end of the cycle. What's the point [of using AMD and Cyrix chips]?" said Michael Dell, chief executive officer of Dell, referring to a tendency for AMD and Cyrix to begin to volume ship faster processors--based on the older Intel architecture--just as Intel in phasing out the old chip architecture and moving to a new one. In this case, Intel is now moving aggressively to the Pentium II and phasing out the venerable Pentium.

The Pentium II is already used in 70 percent of some PC lines, said the Dell chairman, and will take over completely in 1998. Dell will eventually phase out the Pentium across the board, he added.

By contrast, AMD's K series chip architecture has been beset with false starts and near-disasters. More recently, AMD has suffered successive quarters of financial losses as a result of low manufacturing yields. Yield is the ratio of usable chips to total chips produced.

Aggressive competitive tactics from Intel have compounded the problem. Intel has cut prices relentlessly this year--even in quarters where AMD could not make enough chips to meet demand--and has, at least according to Sanders, persuaded manufacturers against adopting the K6.

The price cuts are only good for the consumer. It took the 486 computer three years to reach the $2,000 price point, Dell said. The Pentium II has done this in a mere six months, he added.

Dell and Sanders represent the ends of the spectrum of opinion. Dell, whose company is wedded to Intel technology, has said he has little interest in processors from AMD.

For its part, Intel has stated on numerous occasions that the shift from Slot 1 produces greater performance. Several analysts and benchmarks have backed up the claim. Intel does not comment on pricing, but has historically cut prices fairly aggressively three to four times a year.

But the Pentium II, AMD maintains, is losing some of its steam because of the popularity of sub-$1,000 computers. "Intel does not have an answer to the $999 PC except to regress to the old Pentium" or cut prices, Sanders said.

Performance issues aside, Wall Street analysts say that current pricing trends indicate that the Pentium II is not selling as well as expected and has resulted in price cuts by Intel and unusually low prices for high end systems.

Intel will be drastically cutting its Pentium II pricing for large customers. At least two large Intel customers will begin to pay less than $300 for 233-MHz Pentium II chips on their January orders, according to Drew Peck, semiconductor analyst with Cowen and Company, as reported by CNET's NEWS.COM on Friday of last week.

"My view is that the Pentium II is not meeting Intel's expectations as far as demand is concerned," he said.

Intel will follow this with across-the-board price cuts of up to 25 percent in February.

The 233-MHz Pentium II will sell for $300, a 25 percent drop from its current price of $401. The 266-MHz version of the chip will drop to $401 from its current price of $530, a 25 percent discount. The 300-MHz version will drop from $738 to $562, a 23 percent discount.

In February, Intel will also unveil the 400-MHz Pentium II for a price of $998, he added.

All of these prices were reported by NEWS.COM last Friday.

"The Pentium II does not dramatically improve the performance for consumers," he said, "so they are forced to use price as a lever."

Supply, meanwhile, has increased and led to low system prices.

"There is chip capacity and there is a fairly ample flow of product," said Daniel Kunstler, technology analyst at J. P. Morgan Securities. "You can call up anybody and get a fairly good price."

Price cuts have mostly been seen in computers with the 233-MHz and 266-MHz Pentium II chips, Kunstler said, but recently price erosion has reached 300-MHz models.

"They [300-MHz systems] had been in short supply, but I've noticed some aggressive pricing for the 300-MHz line," he said.

As an example, NEC Computer Systems is offering a PowerMate Pro with a 300-MHz Pentium II that sells for $2,358. The PowerMate Pro266 comes with a 266-MHz Pentium II, 32MB of memory, a 4.3GB, and 15-inch monitor for $2,299. A PowerMate ENT, one step lower on the NEC food chain, with a 233-MHz Pentium II, 32MB of memory, and no monitor, sells for $1,749.

Intel is an investor in CNET: The Computer Network.