Joseph and thread, Article...PC market expects solid holiday PC sales...
-- Most don't believe buyers will wait for Katmai CPU
November 4, 1998
ELECTRONIC BUYERS NEWS : Silicon Valley- Although PC OEMs can't be certain what they'll find in their stockings this Christmas, the 1999 release date of Intel Corp.'s Katmai processor should put to rest one Ghost of Christmas Past.
Third-quarter earnings from PC and chip companies alike indicate a strong seasonal growth pattern, bolstered by a sudden unexpected boost in demand. (See story on page 20.) As a result, industry executives and analysts don't expect holiday buyers to delay their PC purchases until Katmai-based machines are available next spring.
They're also confident that the market won't face the type of New Year's hangover that was created two years ago by Intel and its P55C, also known as the Pentium MMX. In late 1996, Intel promoted the advantages of MMX through the trade press. But manufacturing troubles delayed the P55C's introduction until early January 1997. Savvy consumers chose to wait for the new processor, prompting worldwide sales of PCs to grow 16% in the first quarter, vs. 14% unit growth recorded in the fourth quarter of 1996.
At that point, PC OEMs were forced to juggle older fourth-quarter inventory with demand for the new chips, analysts said. During 1997, sales of Japanese-made PCs grew only 1% from the year before, as Intel cut prices on its "classic" Pentiums.
This year, OEMs are again awaiting a next-generation MMX processor, part of the new features expected in Intel's Katmai chip. But the Katmai will be shipped in March 1999, Intel's customers say, giving OEMs time to work through their Pentium II holiday inventory before turning to the Katmai. Furthermore, PC consumers of late have typically preferred low-cost PCs, potentially lessening the Katmai's impact as a high-performance processor, analysts said.
PC OEMs agreed. "If you look at the top end of the market, where Katmai is expected, that's considerably smaller than when MMX came out," said a spokesman for IBM Corp.'s Personal Systems unit in Armonk, N.Y. "We feel that Katmai will have no effect on holiday sales."
But analysts are sharply divided on Katmai's potential impact on the first quarter of 1999.
Intel has kept relatively mum on promoting Katmai, choosing to concentrate its sales efforts on the higher-profile, low-cost Celeron segment. Historically, however, Intel's strategy has been to quickly persuade the PC market to shift to its newest technology through pricing cuts, casting some confusion on the first quarter of 1999.
"Intel will replace the Pentium II with Katmai using some really aggressive Pentium II pricing, which will fuel increased Pentium II volumes, " said Kelly Spang, an analyst at Technology Business Research Inc., Hampton, N.H. "The catch is, as the price drops, it will be harder for Intel to convince OEMs to buy up from the Celeron and Pentium II lines and pay a premium for Katmai."
At the time of the Katmai launch, a 333-MHz Pentium II will cost $177, according to Intel's customers, while a 366-MHz Celeron processor with integrated cache will cost $188 in volume quantities. A 450-MHz Katmai chip, meanwhile, will command a 10% price premium over a Pentium II at the same clock speed, the customers said.
Talking up Katmai now would only hurt the company, added Scott Randall, an analyst at Soundview Financial Group, Stamford, Conn. "Intel needs to tread very lightly in regard to Katmai," he said. Intel's dilemma is convincing the software industry that its Katmai New Instructions are superior to the 3DNow! instructions designed by AMD, but without imperiling the sale of the Pentium II, he said.
But other analysts and component vendors don't feel Katmai will have much of an impact at all. "The market for low-cost PCs is much stronger now, and that pretty much defines Katmai right out of the picture," said Dean McCarron, an analyst at Mercury Research, Scottsdale, Ariz. Because Katmai is essentially a drop-in processor replacement, McCarron believes there won't be PCs specifically designed for Katmai's other features, such as memory streaming and new means of processing floating-point instructions.
Chip vendors agreed. Six months ago, Intel told S3 Inc. and other vendors that it would release the Camino chipset, with its own multimedia features, in the second quarter, said Scott Tandy, director of marketing for high-end graphics products at Santa Clara, Calif.-based S3.
Thus, S3's next-generation graphics chip has been designed to be released in conjunction with the 4X speed of the Accelerated Graphics Port found in Camino, Tandy said.
Some component vendors, however, refused to speculate on the future of the PC market. In a conference call with analysts, executives at graphics-chip maker 3Dlabs Inc., Sunnyvale, Calif., described themselves as "cautiously optimistic" about PC demand.
"What we're seeing here is that the workstation segment is stable, seems to have a lot less pricing pressure, and is growing," said Osman Kent, president and chief executive of 3Dlabs. "In the mainstream, there seems to be much more confusion in the marketplace. ... But not until the end of the fourth quarter will we have a better idea of how the PC market is doing."
From Intel's own perspective, third-quarter component sales have been selling through, prompting a "relatively strong" second half, said Howard High, corporate communications manager for the Santa Clara-based chip maker. "My guess is that the fourth quarter will be pretty good, although I don't know if that's due to sell-through," he said.
Timing the Katmai's rollout appropriately is certainly to Intel's advantage. The company saw record revenue in both the fourth quarter of 1996 and the first quarter of 1997, spurred by sales of the Pentium MMX. But for the second quarter, Intel reported a 7% sequential revenue decline due to reduced demand and an inventory correction as its customers made the transition to the new chips.
Yet the machine-gun approach Intel has taken with processor introductions may solve the problem, one analyst said. "I don't think there will be a lot of delay in buying systems [because of Katmai]," said Philip C. Rueppel of BT Alex. Brown Inc., San Francisco. "If most companies and consumers have to upgrade, they won't wait. It doesn't pay to wait, because there will always be something better in three months."
By Mark Hachman
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