June 1, 1998
Intel Seems Vulnerable to Low-Cost Chips
By LAWRENCE M. FISHER
AN FRANCISCO -- So inextricably linked are the dual monopolies of the Intel
Corporation's microprocessors and the Microsoft Corporation's Windows operating systems
in desktop computing that industry watchers commonly describe them in a single word: Wintel.
Yet, the paradox of Intel is that the Government is seeking to limit the chip maker's "monopolistic
practices" at a time when the company is facing its greatest level of competition in more than a
decade.
While Intel's market share may be nearly as dominant as that of Microsoft -- about 90 percent of all
computers now sold -- its hold on the desktop is more tenuous.
Microsoft has faced just one serious challenge in the operating system market -- from Apple
Computer Inc.'s Macintosh, whose impact was blunted by years of inept management and strategic
blunders.
Intel, on the other hand, has faced a phalanx of foes over the
years. Now with two scrappy competitors offering lower-priced
alternatives to its microprocessors, it seems more vulnerable than
ever.
The Federal Trade Commission is preparing to file a major
antitrust suit against Intel, accusing the company of abusing its position as the monopoly
manufacturer of microprocessors for personal computers and bullying some computer
manufacturers, lawyers involved in the investigations said last week. The suit will accuse Intel of
selectively withholding important technical information about its chips from companies with which
Intel is involved in patent and related disputes.
Analysts say the suit is less likely to change the competitive landscape in microprocessors than the
pending action by the Justice Department and 20 states against Microsoft could alter the landscape
for software development.
Their reasoning is that the market has already rendered obsolete whatever anticompetitive tactics
Intel may have employed in the past. PC makers who used to fear Intel's retribution for using a
competitor's microprocessors are now more afraid of being left out of the fastest-growing portion of
the market, the sub-$1,000 machines for which Intel's chips are too costly.
"The competitive threat to Intel is actually growing more real because of the swing toward
lower-end machines," said Michael Feibus, an analyst with Mercury Research in Scottsdale, Ariz.
Referring to a competing chip made by Advanced Micro Devices Inc., he added: "Compaq and
I.B.M.'s experience with the K-6 in their product lines has by and large paid off. That started a
ground swell, and now you have Packard Bell, a diehard Intel loyalist, going over to Cyrix in some
machines."
Cyrix, another maker of microprocessors, was acquired last year by National Semiconductor.
Although analysts think the immediate impact of the suit on Intel's financial results will be
inconsequential, they fear a more subtle effect. A company that is the subject of antitrust litigation is
likely to behave in a less aggressive manner than it would have in the absence of such a suit. In the
fiercely contested microprocessor market, any perceived weakness in Intel is a perceived benefit
for Advanced Micro, National and perhaps even Centaur Technology Inc., which was recently spun
out of Integrated Device Technology Inc. to produce Intel-compatible microprocessors.
In the past, the challenges to Intel's dominance came from companies with
chips claiming higher performance: Sun Microsystems Inc.'s Sparc, Silicon
Graphics Inc.'s MIPS, the Digital Equipment Corporation's Alpha, and the
I.B.M./Motorola/Apple alliance's PowerPC. But none of those chips could
run Microsoft's basic versions of Windows, and the ability of some to run
Windows NT, a high-end version of the operating system aimed at
networked businesses, did not stir the market.
The new challengers cannot match Intel's performance at the high end, but
they can undercut Intel's prices at the low end. And even though neither
National nor Advanced Micro has ever been able to match Intel's manufacturing efficiencies, both
have been boosted by partnerships or other contractual arrangements with International Business
Machines for chip production. I.B.M. is itself a world-class chip manufacturer.
The results of those arrangements are already shifting the market. PC manufacturers cannot
profitably sell an $800 PC with a $150 Intel chip; they can make money with a $75 Cyrix chip.
"You can't underestimate the shift to the low end," Feibus said. "That's where the fight is. That's
where the growth is. That's where the volume is."
And at least for the time being, that is where Intel is not. Analysts say that the Celeron, Intel's
low-end response to the K-6 and Cyrix chips, was too little, too late. It is viewed by computer
makers as an overpriced and hobbled version of the Pentium.
Of course, Intel has never been accused of being unresponsive. If driving costs down is now a
better way to compete, rest assured that Intel is shifting strategies. Though Intel is still promoting
proprietary technologies, like a new data bus or a unique socket for plugging the chip into the
computer, it has also focused its energy in recent years on improving manufacturing efficiency.
The market's movement toward low-end computers "shifts the whole strategic environment for Intel
so that instead of the anti-competitive tools they had in the past, they now have to rely on their
manufacturing prowess," said Drew Peck, an analyst with Cowen & Company.
"Four years ago," Peck said, "they were at best a mediocre manufacturer. They are now a very good
one, and they are on their way to being a world-class manufacturer. When Intel was a true
monopolist, the efficiency of their manufacturing was a secondary issue. Now it's primary."
Because the business practices that the trade commission's suit seeks to curtail have little impact on
the company's ability to compete, analysts do not expect Intel to fight this suit with the same
no-compromise approach that Microsoft has taken with the Justice Department. As one Intel
executive, speaking on condition of anonymity, put it: "This isn't a fight; it's a process. The F.T.C. is
just doing its job." |
