All: interesting article. Low-end PII might do away with Slot 1. Paul, any comments?
joey
Pentium II prices to
continue downward
By Michael Kanellos
January 15, 1998, 2:30 p.m. PT
update Desktop and processor prices are nowhere
near rock bottom, analysts say, and will continue
on their downward trajectory because of upcoming
innovations and product shifts from Intel (INTC) as
well as a more competitive marketplace.
Although the company said that its overall profit
margins would decline to 55 from 60 percent next
year in a conference call with analysts yesterday,
observers believe that the company has more room
for price movement than the projected decrease
might indicate.
The decline in margins, said many, comes as a
result of the new additional chip packaging that
comes as part of current Pentium IIs. The gross
margin on the microprocessor core remains close
to, or above, 80 percent, analysts said today.
By removing the pricey packaging on some
processors and introducing new high-end
chips--both of which will occur in the second half
of this year--Intel can effectively maintain its
average selling prices (ASP) and subsidize steeper
discounts on processors and hence completed
desktops--the latter a boon for users. In turn, such
discounting would force other processor makers,
and computer makers, to follow suit.
(Intel is an investor in CNET: The Computer
Network).
"The gross margin issue is a product transition
issue," said Ashok Kumar, an analyst at
Loewenbaum & Company. "ASPs will stay the
same in 1998."
The product shifts that will fuel the cuts will occur in
the year's second half, after Intel releases the
"Deschutes" processors, the next generation of the
Pentium II.
On the low end of the Deschutes line, Intel will
jettison much of the expensive, fancy packaging.
New, low-end Pentium IIs will use a more
simplified circuit board and not contain additional
"cache" memory, said Nathan Brookwood,
semiconductor analyst for Dataquest. Cache
memory is used to bridge the gap between the
speed at which the processor operates and how
fast memory can feed it with data.
In addition, a fourth-quarter release of Deschutes
will eschew the "Slot 1" cartridge and use a chip
package similar in concept to the older Pentium,
added Kumar, saving further costs. Intel executives
have themselves admitted that the Slot 1
architecture could vanish on low-end Pentium II
chips.
On the high end, the company will release a new
generation of pricey server chips that will likely
raise margins and average selling prices.
In the end, if the transition succeeds, these forces
should allow the company to maintain its overall
profitability while simultaneously prompting desktop
cuts.
"In the second half, a Pentium II will cost what a
Pentium costs today," said Brookwood. Prices
could drop to, or below, $100, compared to the
cheapest Pentium II chip today, priced at well over
$200.
"I expect to see Intel's prices pressured more this
year than last, but they are also going to be
introducing new server chips. These will sell for
about $2,000. That makes up for a lot of low-end
pressure."
Historically, the company has used new,
high-priced chip lines to perform this same trick.
Intel engaged in steep price cutting this past year.
However, the ASP was effectively the same as it
was in 1996, said Brookwood, and sales also went
up.
While these product changes may allow Intel to
achieve lower prices in a relatively painless manner,
the level of competition will become increasingly
difficult to deal with, said others.
"Blended ASPs for Intel processors will likely
decline further in 1998 before they show any sign
of stabilizing," said Charles Boucher,
semiconductor analyst with UBS Securities. "In
1996, they didn't have much competition and
Pentium prices remained high. In 1997, a
combination of competition and the popularity of
sub-$1,000 forced prices down."
In contrast to Brookwood and Kumar, Boucher
said that there is actually a strong chance that Intel
has already reduced its gross margins on processor
cores, meaning that Intel is not waltzing unscathed
through these market shifts.
The public's demand for inexpensive computers will
continue to grow, he added, a phenomenon which
appears headed to change the dynamics of the
industry.
"The market has undergone a behavioral change.
You'll see inexpensive mobile machines and simpler
machines in the corporate market," Boucher
predicted. "Customers are asking themselves what
they need rather than blindly buying the
top-of-the-line processors." |
