Lehman Bros report, Mendocino could be bad news.
WHY THE SUCCESS OF P2-M (Mendocino) CAN ONLY BE BAD NEWS: THE SHORT STORY.
The P2-M is different in 3 ways from the P2: 1) Its bigger (costs 40% more), 2) Its packaged at lower cost (saves 40%), 3) It's due to sell for 50% less (a P2/300 is now at $412; the P2-M/300 is scheduled to be priced at $150.) A BIG SUCCESS WITH THE P2-M WOULD DRIVE MARGINS LOWER.
WHY THE SUCCESS OF P2-M (Mendocino) CAN ONLY BE BAD NEWS: THE LONGER STORY.
In the chip industry, cost varies exponentially with chip size (double the size of a chip with the same process technology and it will cost more than 4 times as much.) The reason INTC's margins during the past year have dropped from 64% to 49% is in part due to the fact that ASPs on processors have slipped from roughly $260 to about $225. As important, however, is that the
cost per processor has moved up from about $40 to about $75. INTC is packing more into each processor and selling them at a lower price. Why? Competition. And the worst possible situation for INTC would be strong success of the new upcoming P2-M (Mendocino). The P2-C (Celeron) is just a P2 in a different package offered at a much lower price. The savings on the package and associated chip costs is trivial ($20) compared to the price difference (a P2-C/300 will soon sell for $99 vs. a virtually identical chip packaged as a P2/300 selling now at $412 and soon at $316).
INTC, IN FACT, HOPES USERS MOVE UP TO FASTER PERFORMANCE WHILE COMPETITORS
TAKE A BEATING IN THE LOW END. INSTEAD, WE SEE THE CUSTOMERS DEMANDING CHEAP PROCESSORS, THE LOW END MARKET INCREASINGLY IMPORTANT, COMPETITORS TAKING SHARE IN THIS SECTOR, AND INTC BEING FORCED TO DEVOTE AN INCREASING PERCENTAGE OF ITS OUTPUT TO THE PRODUCTION OF COSTLY, POWERFUL PROCESSORS SOLD AT LOW BALL PRICES. Because of its slow bus, the P2-C has not been a big success.
Meanwhile, estimates of AMD's ($16; rated 3) 3Q98 K6 unit volume are edging higher. So INTC is integrating cache on board and moving the speed up 2 notches (a P2-M/333 will soon be introduced followed by a /366). THE P2-M WILL BE A BIGGER (I.E. MORE EXPENSIVE) CHIP THAN THE P2 BUT WILL PRICED MUCH LOWER. IF THE MARKET ACCEPTS THIS CRIPPLED CHIP IN A BIG WAY (THE HIGHEST SPEEDS AND FASTEST BUS WILL NOT BE INTRODUCED), HOW CAN THIS PUSH INTC'S MARGINS IN ANY DIRECTION BUT DOWN? For instance, we expect the larger (more expensive) P2-M/333 to be priced at $190 in August vs. the P2/333 at $316.
Full report at lehman.com |
