from wsj:
......
August 21, 1998
Intel to Unveil New Line of Chips
To Target 'Budget' PC Market
By DON CLARK and DEAN TAKAHASHI
Staff Reporters of THE WALL STREET JOURNAL
Intel Corp. is finally mounting a credible response to sub-$1,000 personal
computers, but the prospect of even cheaper PCs is raising new fears
about prospects for the semiconductor market.
The Santa Clara, Calif., company on Monday will announce a line of
microprocessor chips that represent Intel's best hope for taking back
market share in the fast-growing sub-$1,000 PC segment. Rivals
Advanced Micro Devices Inc., National Semiconductor Corp.'s Cyrix unit
and Integrated Device Technology Inc. exploited Intel's late entry into the
budget-priced PC market, and a low-end chip called Celeron that
received poor reviews. An improved version of that chip, code-named
Mendocino, is expected to cost PC makers $139 to $179, said Ashok
Kumar, an analyst at Piper Jaffray Inc.
That's quite a comedown for a company that
usually starts new chip pricing well above
$500, and one whose profit margins have been under pressure lately.
Some analysts now think the pressure will only get worse.
Thomas Kurlak, who follows chip stocks for Merrill Lynch, Thursday
lowered his long-term rating on Intel to "neutral" from "accumulate,"
predicting that Intel's average selling prices will decline 33% over the next
five years. Mr. Kurlak wrote in a research report that PC prices could sink
as low as $200, suggesting prices as low as $30 for Intel chips.
The prospect of even more drastic price cutting followed on the heels of
negative earnings news Tuesday from National Semiconductor Corp., LSI
Logic Inc. and Analog Devices Inc., driven in part by continued weakness
in Asian chip markets. Taken together, the developments cast additional
doubt about the timing of any recovery for the struggling industry.
Intel shares Thursday sank $3.5625 to $86 in Nasdaq Stock Market
trading. Texas Instruments Inc., also downgraded by Mr. Kurlak, fell
$1.625 to $58.875 in New York Stock Exchange composite trading. Also
on the Big Board, National Semiconductor declined $2.0625 to
$11.5625, Analog Devices closed down $1.75 at $19.75 and LSI Logic
closed at $15.125, off 68.75 cents.
Not all analysts are so gloomy about the market. For one thing, falling chip
prices don't necessarily translate into lower profit margins, because
semiconductor makers can often lower costs even more quickly through
advances in manufacturing technology. In addition, Intel is simultaneously
announcing lucrative high-end chips that help to balance out reduced
profits on new low-end products.
"The impact of these low-priced PCs is completely overblown," said Mr.
Kumar of Piper Jaffray.
Intel had no direct comment on Mr. Kurlak's conclusions, and declined to
provide specifics about the new Celeron chips in advance of the Monday
announcement. But a spokesman noted that the company hasn't changed
its guidance to analysts about its profitability. Intel's gross profit margins
slid from 54% in the first quarter to 49% in the second quarter, but the
company still expects the year to finish at an average of 52%. "Over the
long term, it will be 50% plus or minus a few [percentage] points," the
spokesman said.
Still, rock-bottom PC pricing is undeniably changing customers' buying
patterns, and affecting strategies throughout the industry's food chain. The
new Intel Celeron chips, targeted at chips costing around $900, still aren't
suited for newer machines, pushing prices much lower.
Micro Center, a chain of computer stores, has been selling a $500
computer with a Cyrix chip since November. Sun TV & Appliances Inc.
and Fry's Electronics, both with dozens of stores, followed suit in March
with a $499 machine built by Millenium Electronics in Irvine Calif.
PrecisionTec LLC, a manufacturer in Costa Mesa, Calif., Thursday
announced a machine for $399 that uses a chip from Integrated Device
Technology and which it expects to sell over the Internet through
companies that include Egghead.com Inc. (The lowest-price PCs typically
don't include monitors.)
"It's like the VCR," says Troy Barnes, chief executive officer of Millenium,
which sells its $499 machines under the NetRam label. "It's inevitable that
technology is going to come down into the right price range for all
consumers. I'm betting that more retailers are going to come in line just to
keep the other guys from getting all the sales."
Mr. Kurlak, in a research report, estimates that budget-priced PCs now
account for about 27% of the market, and may swell to 60% of the market
in five years. If Intel retains 80% of that business, he calculates, its gross
profit margins are likely to fall to 45%. The company's rivals, meanwhile,
expect to make money at low price points that Intel will be slow to
embrace.
"There is going to be room under Intel's prices," said W.J. "Jerry" Sanders
III, AMD's chief executive officer. "If it's a fully functional PC, AMD
wants that business."
Intel, which is also introducing a high-end version of its Pentium II line
Monday, won't specify how low it is willing to go in pricing, but says it is
determined to follow the market. "At some point, the reality is you can't
make money -- the business isn't sustainable," said Karen Alter, an Intel
marketing manager. "That said, we will not walk way from a market
segment."
|
