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To: Jules B. Garfunkel who wrote ()3/18/1997 10:23:00 AM
From: Michael Olsen   of 990
 
Margin erosion in Intel.

My concern about Cyrix and AMD is that they are going to have the same effect on Intel's margins that Intel's brief, and small intrusion in the motherboard business had on the motherboard manufacturer's margins. As you recall, MBs were selling with 30-50% margins; Intel introduced motherboards at essentially no margin, and immediately seized 10% of the market. This caused the other motherboard manufacturers to reduce their prices to compete. Intel didn't make money in the market, but the margin on motherboards has never returned.

Similarly, AMD and Cyrix will put price pressure in Intel. Intel will have to lower prices to push them out of the market. AMD and Cyrix won't make any money (so don't believe anyone who says AMD is a hedge against Intel, it isn't), but Intel's profits will be eroded. That's the nature of competition; they guy who can enter the market with a lower profit expectation can lower the price point for the whole market.

The only differentiating factor in the AMD/Cyrix v. Intel as against the Motherboard business is capacity. The MB makets were in jeopardy of losing much more market to Intel MBs and they knew that, if necessary, Intel could ramp production. Here, there may be less incentive to reduce price so long as the market demands all production capacity.

I'd be interested in the groups thoughts about the threat of eroding margins for Intel.

Michael Olsen
molsen@dnai.com
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