The Competition
For a significant period after the introduction of its Pentium chips, Intel enjoyed a virtual monopoly in the market for Pentium-class devices. With AMD fumbling badly with its K5 chips, Cyrix having heat problems with the earlier versions of its 6x86 alternative, and NexGen lacking a pin-compatible alternative for the Pentium, the road for Intel was fairly smooth. That situation, of course, has changed.
As a consumer, the emergence of credible competition is welcome news. In fact, Cyrix (now part of National Semiconductor) and AMD deserve much of the credit for the dramatically more affordable PCs today. Granted that the best offerings of AMD and Cyrix today (a 233 MHz-class chip) are not at par with Intel's best offering at the moment (a 300 MHz Pentium II), the distance between these companies and Intel is less than it has ever been in the past few years. The emergence of such competition and the downturn in Intel's earnings is perhaps not a coincidence.
Some Intel investors would claim that the competition has managed to get "only" a 10% market share (implying that somehow that much market share is not sufficient to impact a dominant player's pricing power) and that there have been previous occasions where the competitors have had an even greater market share. The difference this time, however, is that the competition is fairly close to Intel's top end and not just feeding off yesterday's chips. For an indication of the change in the competitive landscape (and the pricing power), recall that in the fourth quarter of 1996, with its competition in poor shape, Intel decided to skip regularly scheduled quarterly price cuts on its chips (and consequently had a blockbuster quarter). The decision purportedly was made so as not to disrupt the PC sales during the important Christmas season, and the practice was to continue in the future. The sales disruption argument notwithstanding, sharp price cuts were back in the fourth quarter of 1997, however. In fact, Intel even announced an unusual additional price cut (on 233 MHz Pentium II's) between the regularly scheduled quarterly cuts. Anyone who still does not recognize or admit the competitive pressure Intel is facing has to be in denial.
Intel has been fortunate that Apple has been doing so poorly during this time, and a number of people who would have otherwise bought a Macintosh opted for a PC instead, thus boosting the demand for x86 chips. But offsetting this positive development has been the growing market share of the top-tier PC makers at the expense of smaller players. Such consolidation of market share amongst a handful of box makers shifts some of the pricing power from Intel to the system manufacturers. Indeed, several of them - including Compaq, IBM, HP, and Acer - felt bold enough to include non-Intel chips in their offerings. And these companies as well as other top-tier vendors undoubtedly used AMD and Cyrix as leverage to extract price discounts from Intel.
Of course, there are other competitors on the horizon, such as Centaur, IMES, and Rise Technology. The window of opportunity for the competitors, however, may be short-lived. Intel's not-so-secret weapon lies in the proprietary architecture of Slot 1 (and its successors), which is patent protected and has the potential of locking out the competitors. Intel's dominant market share and its will will make Slot 1 the de facto standard within one to two years. And faced with a closed architecture, nearly all of Intel's competitors will face a tough future. The only exception could be Cyrix, which through the cross-licensing agreement between its parent National Semiconductor and Intel, has laid a claim to Slot 1. In fact, I often think that a wise move for Intel would be to not dispute that claim even if it has good legal grounds. Such a decision would keep nominal competition alive (while severely hurting AMD and preventing entry from new players), and at the same time keep FTC off of Intel's back, which otherwise may find Intel's practices anti-competitive.
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