Intel Tests New Pricing Lows with Pentium 4
Story Filed: Monday, April 16, 2001 4:05 PM EST
New York, Apr 16, 2001 (123Jump via COMTEX) -- On the eve of posting its first-quarter results, leading chipmaker Intel Corporation (INTC) is once again hitting new lows in pricing. The move comes even as the processor market sees no bottom and amid slowing consumer demand.
Industry sources expect the company to cut Pentium 4 prices by 50 % to boost demand for its chips as well as overcome stiff competition from both rivals and the gray market. .
According to a CNet report the Santa Clara, Calif.-based company plans to slash Pentium 4 prices in two rounds. One was to have taken place yesterday ( April 15) and the next discount round would be on April 29. The official release of Intel's 1.7GHz Pentium 4 is scheduled for April 23. .
Analysts' reaction to the news of the price cuts was mixed. On the positive side, the company's action is in line with certain strategic decisions made by it earlier. Offering its new processor at competitive prices will also help Intel achieve with greater ease, the phasing out of its Pentium III on the destop market by the year-end.
In addition, lowering its processor prices will help it offset the tough competition offered by its arch rival Advanced Micro Devices (AMD) which is fast gaining ground in the market . Some analysts however predict that cutbacks of up to 50% will have an adverse effect on the company's bottom line. The Pentium 4 is a chip that is fairly large and expensive to make. Besides, Intel gives discounts to PC makers using Rambus memory and now Pentium 4 systems feed exclusively on Rambus memory. A further lowering of prices and additional discounts gives rise to fears that the company's strategy may backfire and lead to a major slide in its profits.
"It is going to have a catastrophic impact on gross margins," said Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray. "You are not going to see any seasonal pickup in demand," he added.
Nevertheless, discounts are inevitable. Large distributors and computer manufacturers have been dumping chips onto the gray, or secondary, market, according to several analysts and dealers. And Intel has to take measures and reduce wholesale prices to stimulate demand.
The company declined to comment on the price cuts. Still, an Intel spokesman said the company would profit from establishing Pentium 4 in the mainstream market.
"We are continuing on our plan to bring Pentium 4 system prices into mainstream price points," said spokesman Seth Walker, adding, "One way to bring computer buyers into stores... is to lower the bill of materials cost,"
The current price of a Pentium 4 system is around $1,200. However, the company is willing to lower the price to $999, ( including a monitor) , by the fourth quarter.
"The proliferation of the Pentium 4 through price cuts could put extra pressure on AMD because of the magic of megahertz marketing," said Kevin Krewell, an analyst with MicroDesign Resources.
Currently, the number which indicates the speed of a chip's internal clock, is one of the most important figures for determining price, though megahertz is just one of many measures for processor performance. AMD's Athlon tops out at 1.3GHz, with a 1.4GHz version expected later this quarter. By contrast, Intel has a 1.5GHz version of the Pentium 4 and will have a 1.7GHz chip this month.
Many analysts agree that at equal megahertz, the Athlon outperforms the Pentium 4 on many functions. And many tests attest to the superiority of the 1.2GHz Athlon over 1.5GHz Pentium 4. Still, AMD has to price its chips by megahertz, thus failing to capitalize on its winning parameters.
"AMD is forced into a frequency matchup with Intel, which is beneficial to Intel," Krewell said. "The looming price cuts are very similar to what Intel did with the Pentium and (AMD's) K-5."
Meanwhile, AMD also cut prices twice in the last two weeks and offered extra discounts to large computer manufacturers when they buy in large quantities.
According to several analysts, the gray market activity has picked up in recent months.
Each 1.5GHz Pentium 4 system for example sells at $637 each in wholesale quantities of 1,000, while the 1.4GHz version is available at $423. Although Intel's wholesale prices are usually lower than its retail prices, sometimes the reverse is true.
For example, Dallas Memory International sells the 1.5GHz for $500, while the same chip with a fan, a heat sink and 128MB of Rambus memory sells for $657. A 1.4GHz Pentium 4 goes for $370 while the fancy bundle goes for $450. All chips are in stock, according to a sales representative.
As regards AMD, the 1.3 GHz Athlon is officially sold for $318 while the 1.2GHz version sells for $268 in wholesale quantities of 1,000. Distributors, though, are selling the 1.3GHz chip for $223 and the 1.2GHz for $201.
"The gray market is a much larger problem these days," said Rob Guella, president of RB Computing, an authorized AMD dealer in Nepean, Ontario. "When there are a lot of CPUs on the market, that concerns AMD. Price cuts will depend on how much gray market activity they find."
"When you see steeply discounted products, someone other than Intel is taking a hit," said Dean McCarron, principal analyst at Mercury Research. "The gray market grows in times of short supply or oversupply. In times of oversupply, you have the (computer makers) dumping their inventory. In the shortage situation the same thing happens because they can make more by selling the chip."
With gray market and rival competition breathing down its neck, Intel's pricing cutbacks are not much of a surprise. Intel is scheduled to post first-quarter earnings on Tuesday and analysts foresee gloomy reports of slowing sales and canceled orders. |
