Intel fuels the fire with Celeron cuts
Intel is slated to cut prices on its line of low-cost Celeron chips on Monday, causing some
analysts to wonder whether this aggressive low-end chip strategy might ultimately do more
harm than good. In a move that will likely rattle the PC and chip markets, Intel will cut
prices on its increasingly popular Celeron line of chips. But some analysts think if Intel
continues to sell more of these low-priced chips, revenues could suffer. In short, as Intel
boosts Celeron shipments, the overall average selling price of Intel chips dips. Prices will
fall about $10 on the cheapest Celeron chips and more on higher end versions, according to
industry sources familiar with the price cuts on Monday. Pentium II prices are slated to be
cut on February 28 when the Pentium III arrives, Intel has said.
Linely Gwennap, editor director of the Microprocessor Report, believes that Intel could be
setting itself up for a revenue shortfall if buying trends don't pan out as Intel is
forecasting. "If only 10 percent of its sales shift from [the high end] Pentium II to
Celeron, Intel will lose more than $1 billion in 1999 revenue due to the lower prices of the
Celeron," according to Gwennap, writing in the most recent addition of the newsletter.
Gwennap adds that this would happen only if buyers of Pentium II-based systems, mostly in the
corporate market, start snapping up Celeron-based systems instead.
"There is no doubt that Intel has ignited a price war [with the Celeron] " he added. Intel
doesn't agree. "I'm somewhat confounded by this," said Intel spokesperson Manny Vera. "Yes,
we are getting aggressive with Celeron...then people assume there is a price war. But that
[the Celeron chip line] is just a small chunk of our business." Intel also takes issue with
the potential revenue shortfall. Intel CFO Andy Bryant gave some "guidance" recently in a
meeting for financial analysts where he asserted that profit margins for 1999 are expected to
be 57 percent, up 3 percent from In 1998.
Intel is counting on strong revenue from high-end processors such as the upcoming Pentium III
processor and its Xeon line of workstation and server chips. Intel's chips for notebook PCs,
in some cases, also sell at a premium. Intel also says that it is cheaper to make Celeron
chips and therefore it doesn't take that big of a hit on profit margins. Despite what Intel
says though, the low end of the market has all the hallmarks of a price war with Advanced
Micro Devices (AMD) chips, which are expected to go for as little as $40 in March--almost
unprecedented in the Intel-compatible chip market. AMD sells most of its chip to makers of
low-end consumer PCs.
Ashok Kumar, an analyst at Piper Jaffray, predicted that the price of K6-2s sold to PC makers
in March will be $40 for the 333-MHz version and range up to $60 for 400-MHz processor.
Currently, Intel's lowest priced Celeron lists for $71. The popular 333-MHz version is priced
at $90. The 400-MHz version, which is expected to be a hit, is priced at $158. A 433-MHz
Celeron chip is due in March, said sources, while a 466-MHz version will come out in May with
a 500-MHz chip to follow. Kumar expects that Celeron chips will comprise about 25 percent of
the Intel "product mix" in the first quarter of 1999. "If there was a sudden shift in this
mix, it would impact the bottom line," he said. Though he doesn't expect the scenerio that
Gwennap postulates.
Meanwhile, resellers and chip dealers report that Intel has been more tight-lipped about
processor pricing this year than in the past. Before, dealers would get price lists weeks or
even months in advance. Now, most get the new price lists right before, or on the day of, the
price cuts. "We're more confused than ever. They keep changing things on us," said one
source. "They are not being very up front on pricing for the faster chips." Competition seems
to be at the heart of the shift, said one source. In the past, Intel could dictate the price
of chips and therefore could map out pricing. Now, with a smaller market share in the low
end, Intel finds it has to adjust prices according to circumstances, which makes the price
less predictable. And, although the company still does not have a lot of competition in the
performance arena, price cuts in the low end of the market effect the high end. High end
Pentium IIs, for example, can't be much more expensive than Celeron processors because the
performance gap between the two lines has shrunk.