Laptop Makers Don't Want This Intel Inside

The new Centrino comes with a disappointing wireless chip

Ten years ago this month, Intel Corp. (INTC ) unveiled its first Pentium processor. On Mar. 12, accompanied by an all-out international marketing campaign, the chipmaker will take the wraps off its next great hope: Centrino. It combines a powerful new Pentium processor and chipset with a Web-surfing wireless chip. Today, PC makers buy those components separately, but Intel claims they work better as one package and use less power -- a crucial combination for the next generation of notebooks. Indeed, Intel is betting that Centrino will further seal its dominance of the market for PC chips as more individuals and corporations shun desktops in favor of laptops. Proclaims Intel President Paul S. Otellini: "This is the biggest thing since Pentium."

Too bad PC makers don't agree. Dell Computer Corp. (DELL ), Hewlett-Packard Co. (HPQ ), and other top manufacturers are eager to harness the extra power and efficiency of the new Pentium, but they are underwhelmed by Intel's wireless technology, which they say transmits data more slowly than those of rivals such as Broadcom (BRCM ).

And while they are free to buy just the Pentium and use another company's wireless chip, Otellini says Intel won't provide crucial marketing support unless PC makers take the whole Centrino package. "The [PC makers] and Intel are spending a lot of time gnashing their teeth over this," says IDC technology analyst Roger Kay.

The contretemps could hardly come at a worse time. Analysts estimate that some 180 million corporate PCs are using old operating systems that make them overdue for replacement. Moreover, notebooks boast higher gross profit margins than desktop computers -- 22% vs. 15% -- a crucial difference at a time when Intel and notebook makers are struggling to improve their earnings after two years of weak sales.

Given the stakes, why are the PC makers choosing this moment to make a rare stand against Intel? In large part, they are reflecting their customers' preferences. Corporations are finicky buyers. They want desktops and notebooks that will last for at least three years without major upgrades, says Jay Parker, senior brand manager for Dell's corporate Latitude notebook line. But Intel has said publicly it will update the Centrino package at least twice in the next six months to add a new wireless chip and boost the processor's speed. Even then, industry insiders complain, Centrino could lag rival wireless chips. Intel denies that and says its chip will work best with Pentium. "Centrino is not for everybody," gripes Matt Wagner, senior product marketing manager for HP's notebook business.

What's more, notebook manufacturers perceive an ulterior motive behind Intel's Centrino launch. While Otellini says Intel is combining features in one package "so everything works [well] together," some PC makers fear Intel could boost prices if it were to become the sole supplier for most of a notebook's innards. And even if Intel didn't raise prices, PC makers say they'd prefer to continue buying components from numerous suppliers so they can better set themselves apart from competitors.

Particularly irksome, say PC makers privately, is the fact that Intel seems to be forcing Centrino on them. Those who want just the new Pentium will sacrifice lots of advertising dollars. For years, Intel has subsidized the PC industry's ad budgets, requiring only that PC makers mention their products' use of Intel chips -- the famous "Intel Inside" slogan. Intel is proposing to spend a giant $300 million marketing Centrino this year, and PC makers are loath to lose such largesse. But they don't like having to accept an inferior wireless chip in the bargain.

PC makers are coming up with strategies to have it both ways. Dell, Toshiba (TOSBF ), HP, IBM (IBM ), and others plan to offer Centrino-branded notebooks as one choice but also give customers the option of upgrading to other wireless chips. That way they'll get the Centrino marketing dollars.

The upgraded notebook wouldn't have a Centrino sticker, but PC makers figure customers won't care. For its part, Intel is betting that its massive marketing campaign will boost demand for Centrino among the buying public.

Still, Intel clearly has work to do if it hopes to dominate the next generation of wireless notebook chips. Getting there will require improving Centrino's wireless chip -- and easing clients' concerns. Intel can't afford not to.

By Cliff Edwards in SanMateo, Calif.

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