Fortress IntelRobert Hof
With a 90% share of the microprocessor market, Intel Corp. could be forgiven for putting up its feet for a while. Instead, the $8.8 billion chipmaker has startled rivals by launching an unprecedented price war: Over the next three months, it plans to cut prices on everything from mainstream 486 chips to top-of-the-line Pentiums--leaving some products 40% cheaper than just four months ago.
What's with these people? Chalk it up to feisty Chief Executive Andrew S. Grove's dictum: "Only the paranoid survive." A growing pack of hungry rivals is out to steal a chunk of Intel's wildly profitable, $7 billion, IBM-compatible, PC microprocessor business. Already, Pentium clones from AMD, Cyrix, IBM, and others are showing up in PCs from Compaq Computer Corp. and AST Research Inc.
Intel's strategy: Outrun them all. By slashing prices fast, it hopes to establish Pentium as its mainstream chip by mid-1995--before rivals can make much of a showing. Pentium's key edge: No other chip runs PC applications so fast. That's why Pentium shipments doubled from the first quarter to the second, estimates Robertson, Stephens & Co. Says Intel Senior Vice-President G. Carl Everett Jr.: "This is far and away the fastest product transition we've ever made."
Not everyone appreciates the feverish activity: Intel stock, at about $59, is near its 52-week low, weighted down by worries that Intel could miss 1994 profit projections. Investors are concerned that inventories, which ballooned 21% from March to June, could signal a glut of low-end Pentiums and 486s.
WAR CHEST. Quite the opposite, insists Everett. He says it's a war chest for expected back-to-school PC sales. Intel hopes to move as many Pentiums as possible while prices are relatively high. High-end Pentiums carry 80% gross margins at current prices, compared with 50% or less for most 486s. Even after the price cuts, Robertson Stephens analyst Daniel L. Klesken figures, the year-old Pentium will gross up to $4 billion this year--almost 30 times more than the 486 in its second year.
But dropping prices will be key to getting those sales. Prices used to fall gradually, once every quarter, as production yields improved. Now, the Pentium already is selling for 40% less than the 486 did in its second year. That's throwing some competitors for a loop. To keep pace, NexGen Inc. must cut prices up to 35% next month--before it has even started shipping its products. Adds John Bourgoin, a vice-president at Advanced Micro Devices Inc., which also has a Pentium rival in the works: "They've made it more difficult for us."
There's financial and manufacturing muscle behind Intel's tough pricing. Because high-end Pentiums are smaller and produced on larger silicon wafers, they cost 60% less to make than the low-end Pentiums, estimates Kidder, Peabody & Co.'s Jonathan Joseph. Indeed, despite price cuts so far, Intel's gross margin rose in the second quarter for the first time in a year.
That's an encouraging sign for the biggest battle yet to come. When AMD and Cyrix Corp. start shipping their Pentium-class chips early next year, PC makers expect Intel to lower the boom. Then, for the same price as last January, consumers will find machines twice as fast. Intel may see its vaunted margins dented; but rivals may face worse.