Intel Steps Up Use of Price Cuts
To Protect Its Turf and to Expand
WSJ article June 9, 98
By DEAN TAKAHASHI
Staff Reporter of THE WALL STREET JOURNAL
SANTA CLARA, Calif. -- Intel Corp. is stepping up the use of pricing as a weapon to protect its biggest business and to expand into new markets.
The giant chip maker Monday dropped prices by 12% to 32% on its flagship Pentium II microprocessors, the third cut this year as Intel reacts to slowing demand for personal computers and to rivals at the low end of the market. Microprocessors act as the computing engines of PCs, and Intel dominates the field with about 85% of the market.
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Intel is also attracting attention by slashing prices in its newest business, chips used to display graphics on PCs. John Latta, president of 4th Wave Inc., a Washington market researcher, said that Intel is selling below manufacturing costs in some Asian markets to unload inventories of unsold products. An Intel spokesman denied its prices are below production cost, a condition that could put the company in violation of laws against the practice known as dumping.
The developments come as the U.S. Federal Trade Commission filed a long-awaited antitrust suit focusing on the way Intel allegedly uses its control over technical information to muscle customers. Pricing isn't a part of the initial complaint, but the FTC is continuing to investigate the company's moves beyond the microprocessor market, and Intel's pricing in other businesses is likely to draw the agency's attention.
Prices are inevitably driven lower in the semiconductor business as manufacturers find ways to shrink circuitry to increase performance and boost the number of working chips on each silicon wafer. For example, Intel Monday unveiled a faster version of its Celeron line for PCs priced at less than $1,200, which operates at a speed of 300 megahertz. That chip, at $159, is 11% faster than a 266-megahertz Celeron. Intel Monday cut the price of the slower chip by 32% to $106.
Until recently, Intel has been able to persuade most PC buyers to upgrade to faster systems, priced at $2,500 or more, that use microprocessors that cost several hundred dollars. But the latest cuts reflect a continuing market shift, as customers have become satisfied with the performance of machines priced at $1,000 or even lower.
In graphics chips, Mr. Latta said that Intel has been churning out unusually high volumes of a product called the I-740, at prices ranging from $7 to $26, to PC makers in Taiwan and other Asian countries. He said the $7 price applies to customers that buy the graphics chip bundled with Intel microprocessors and other accessory chips. The Intel spokesman denied that the company is bundling, a practice also frowned upon under antitrust law. Mr. Latta estimates that it costs Intel about $16 to make each chip. He said the company's pricing is having a devastating effect on the market, which is going through a major transition as PC graphics evolve from two-dimensional to three-dimensional animations.
"The effects are being felt throughout the 3-D industry," Mr. Latta said in a recent report. "It remains a mystery why Intel would engage in such destructive actions."
Last month, Osman Kent, chief executive officer of graphics-chip maker 3Dlabs Inc., warned that the company's earnings would be below expectations because of "competitors dumping chips in Asia." In an interview, Mr. Kent declined to name the competitor. But people close to 3Dlabs said that Intel, which holds a small stake in 3Dlabs, is the primary company Mr. Kent was talking about.
Intel's spokesman said the company has sold the chip below its $28 list price but not below its manufacturing cost. He declined to specify the company's exact pricing for the chips or disclose its manufacturing price.
Dean McCarron, an analyst at Mercury Research in Scottsdale, Ariz., said Intel was forced to offer rock-bottom prices because the chip was expected to be launched last summer and didn't hit the market until February. Meanwhile, other chip makers, such as Nvidia Inc. in Sunnyvale, Calif., and S3 Inc. in Santa Clara, are expected soon to offer potentially superior products. Peter Glaskowsky, an analyst at Micro Design Resources Inc., estimates that Intel may have grabbed about 6% of the graphics-chip market since its entry in February.
Intel, because of its huge research and manufacturing spending, is also well positioned to compete by integrating multiple chips together. Jen-Hsun Huang, chief executive officer of Nvidia, said he isn't worried about Intel's current treatment of his company. But he is worried about competition from a forthcoming Intel set of accessory chips, code-named Whitney, that come with graphics features built in. The product could eliminate the need for separate graphics chips in low-cost computers, analysts said.
But some analysts characterize Intel's pricing moves as a defensive reaction to sub-$1,000 computers, not as an offensive strategy. "Some people may regard it as predatory pricing," said Drew Peck, an analyst at Cowen & Co. "I regard it as the only way to stay in this business."
Intel, which recently put off the arrival of its next-generation chip line until mid-2000, also discussed two high-end chips that could help extend the appeal of its Pentium II line. Tanner, the code name for a chip the company hadn't discussed before, is expected during the first quarter of 1999 and operates at a speed of 500 megahertz. Intel is also moving up the delivery date of another 500-megahertz chip, code-named Katmai, to the first quarter of next year from the second.
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