Intel Developer Forum Marks New Pricing Model
By Jim Seymour
Special to TheStreet.com
8/28/01 1:41 PM ET
The Intel (INTC:Nasdaq - news - commentary) Developer Forum, running this week in San Jose, Calif., has become one of the two big news-generators among personal-computer technology conferences. (The other is Microsoft's (MSFT:Nasdaq - news - commentary) Windows Hardware Engineering Conference.) This week's IDF is no exception, and I'll be keeping you up to date on the most important news from an investor's perspective.
From my hotel-room window in the Fairmont, I could see the Intel folks trooping in, rehearsing over the weekend, as the TV people set up around them for their private video coverage. A technician in the TV control truck told me that this was Intel's biggest TV effort yet, which reflects just how importantly Intel is taking itself now -- and how important it believes this week is to its future.
The big news of the week, of course, was Monday's official rollout of the new 2GHz (gigahertz) Pentium 4 CPU chip, currently the fastest production microprocessor for PCs on the planet. This had cosmic -- as well as business -- implications for Intel, which has been struggling to re-establish its reputation as the technology leader in chips for PCs.
I'm not sure Intel's assertion of that status is entirely true. Advanced Micro Devices (AMD:NYSE - news - commentary) is set up down the block in the San Jose Fairmont Hotel, where it's running behind-closed-doors demos and briefing sessions on its own new chips. AMD has been beating Intel like a drum in price-to-performance ratio on CPUs, with its speedy Duron and Athlon chips, and it's fair to say at least that the contest continues.
Breaking the imagined "2GHz barrier" was more than a little artificial -- something like the four-minute mile or the first day we traded more than a billion shares on the New York Stock Exchange, both convenient but manufactured milestones.
Price Matters
What was really important in Monday's announcement was the pricing structure for the 2GHz Pentium 4 chip. Intel has been promising a dramatic restructuring of its price list, with an eye toward making the present (very nice) Pentium III chips obsolete almost overnight. That's seen as critical to getting the PC market moving again -- and, once again, to re-establishing Intel's dominance.
As I said here last month, Intel has long relied on a model in which it regularly rolls out new, faster CPU chips, initially at very high prices ($1,000 to $1,500 each or so, in the standard OEM-buyer's quantity of 1,000 chips). Then it gradually pushes those prices down as newer and faster successors appear. That's the model that built the Intel of the '80s and especially the '90s, funded Intel's hugely expensive research-and-development program and led to Intel's high price-to-earnings ratio.
But it's been clear for at least a year that sky-high prices at rollout no longer work for new chips. No one will buy them, preferring to stay with the older, slightly slower but perfectly satisfactory and much cheaper designs.
So on Monday, the new 2GHz superchip came out, not at the $1,000 or so we might once have expected, but at just $562 (in OEM quantities). Beneath that price point, Intel pushed its slightly older (and almost imperceptibly slower) 1.8 GHz Pentium 4 chips down to $256 and the still-darned-fast 1.6GHz Pentium 4s down to just $163. Those are unheard-of prices for such speedy, powerful chips, and they are already having an effect on PC makers' prices.
The PC Makers' Response
Compaq (CPQ:NYSE - news - commentary) announced Monday a complete Pentium 4-based Presario system for about $1,700, and Dell (DELL:Nasdaq - news - commentary) is close to matching that with a new Pentium 4 version of its hot 8100 Dimension PC for around $1,800. Dell is also promising a richly configured power-user's 2.GHz Pentium 4 system for about $2,200 very shortly.
Other manufacturers are following suit. The 2.4GHz Pentium 4 and the new overall lower Pentium 4 pricing were no surprise to them (nor to anyone else who watches the microprocessor market), and it seems likely that Intel's stated goal of getting Pentium 4 PCs into the sweet spot of the market, just under $1,000 for the important "Christmas quarter," will be met.
AMD, in turn, Monday afternoon announced steep cuts of its own. Its top-of-the-line Athlon 1.4GHz chip was chopped to $130 -- again, that's AMD's fastest, high-end chip! -- and slower Athlons were pushed down even further. AMD is telling visitors to its rooms at the Fairmont that they will see a new 1.5GHz Athlon this month and a new 1 GHz Duron econo-chip in October at similarly low prices.
(AMD's chips typically outperform Intel's at the same rated speeds, so that a 1.4GHz Athlon has generally performed as well as or better than, say, a 1.7GHz Pentium 4. That gap is likely to continue, although Intel says that with the 2.4GHz Pentium, it has clearly trumped the Athlons.)
All this price-cutting is great for computer buyers (who will get more machine for their money), good for computer makers (who will likely see at least some uptick in PC sales with the new, faster and cheaper offerings) -- and absolutely terrible for Intel and AMD, whose costs have not dropped anything like their new selling prices.
For Intel, it's a matter of reasserting dominance and control ... and also of whacking upstart AMD, which has been ripping chinks out of Intel's hide and market share all year. For AMD, it's a matter of, well, staying in the game. Intel holds all the cards here: AMD pricing is controlled strictly by what Intel does.
It'll be a couple of quarters before we see the effects of these fire-sale prices on the companies' balance sheets.
Intel is making a huge bet that computer buyers, both consumers and corporate IT managers, are a lot more price-sensitive than they're believed to be.
If that bet fails, Intel's going to be in the woods for a lot longer than most investors and some analysts have been saying.
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Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. |
