Competition in Chip Industry Is About to Get a Bit Fiercer

TIMES STAFF WRITER

Amid steady reports of an impending Federal Trade Commission antitrust lawsuit against Intel's mountainous empire, the competitive landscape of the microprocessor industry is rapidly shifting underfoot.

On Thursday, one of Intel's chief competitors, Advanced Micro Devices, announced a new version of its flagship central processor, dubbed K6-2, that appears to have significant price and performance advantages over competing Intel chips. AMD announced that IBM and Fujitsu, as well as a number of smaller PC makers, will use the K6-2.

And today, Intel's other key rival, National Semiconductor, expects to announce a large deal with Wyse Technology, a leading maker of computer terminals that use Microsoft Windows. The agreement calls for San Jose-based Wyse to buy 1 million chips produced by National's Richardson, Texas-based Cyrix subsidiary during the next three years. The plan involves both the current MediaGX processor series and a commitment to National's PC-on-a-chip technology.

Products based on the single-chip concept, which would consolidate most PC functions on a single processor and represents National's core product strategy, will emerge in the first half of next year, the company says.

The announcement follows on the heels of a deal with Packard Bell NEC, one of the largest PC makers, to use Cyrix microprocessors as the brains for low-cost computers that Packard Bell NEC expects to account for more than half its sales by the end of this year.

Analysts say aggressive pricing on AMD's new chip, which includes special 3-D capabilities targeted at the game market, should give it a boost over Intel offerings designed for $800 to $1,500 PCs.

"You'll see $800 machines with very good 3-D performance," said Martin Reynolds, an analyst with Dataquest in San Jose.

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Meanwhile, AMD insists that nagging production problems are a thing of the past. If so, that could help the company reverse its recent financial slide. For the quarter ended March 29, AMD lost $55.8 million because of weakness in the semiconductor market and the failure to meet demand for certain versions of its K6 line. It was the company's third straight quarterly loss.

"There's no way, short of industrial espionage, to know" if AMD's manufacturing woes are over, said chip analyst Michael Slater of Sebastopol, Calif.-based MicroDesign Resources. But Slater and other analysts say that AMD's confidence in its manufacturing is credible, given the company's past openness about production problems.

Against this backdrop of competitive pressure, the FTC is looking into allegations that Intel has used its near-monopoly in PC central processors to dominate other important markets--a possible violation of the Sherman Antitrust Act. Intel processors are used in the majority of PCs, and according to Dataquest, the company grabbed about 80% of industrywide revenues for microprocessors in 1997.

Intel has consistently denied violating antitrust laws. It conducts training for its employees to ensure compliance with all antitrust guidelines, spokesman Howard High said. And after a previous two-year investigation, ending in 1993, the FTC elected to take no action against the company.

The alleged antitrust violations in the current investigation include the selective withholding of information from PC makers that use Intel chips but are engaged in disputes with Intel. In a prominent case involving Huntsville, Ala.-based Intergraph, a maker of advanced computer workstations, the U.S. District Court for the Northern District of Alabama recently enjoined Intel from engaging in such practices.

Another major part of the FTC probe may involve allegations that Intel has unfairly attempted to move the industry to a new, proprietary standard for connecting central processors to a PC's main circuit board. That technology, known as Slot 1, replaces Socket 7--an open industry standard still used by Cyrix, AMD and other companies. Slot 1 was introduced last year with Intel's Pentium II processor family.

"It's reasonable to infer that the new packaging for the Pentium II was [designed] to exclude competitors," said Phil Lemmons, editorial director of San Francisco-based PC World magazine. But ironically, he added, "that strategy backfired at the low end, because it's a very expensive packaging."

The added expense, plus disappointing performance from Intel's new Celeron processor designed for low-cost PCs, has boosted the Socket 7-based products of both Cyrix and AMD.

Earlier this year, it became clear that some competing companies--including AMD and Cyrix--can build Slot 1-style processors and related components as a result of long-standing cross-licensing agreements. Intel also recently awarded a license to the portion of Slot 1 involving chipsets--the processors that control subsidiary PC functions such as memory and communications pathways.

But Cyrix is committed to its PC-on-a-chip strategy. And AMD will move forward next year with a new "Slot A" architecture licensed in part from Digital Equipment. Neither company expects Slot 1 to be a big factor in its future products.

AMD hopes to achieve a 30% market share in PC central processors by 2001, said Ben Anixter, vice president for external affairs. The company is building the massive fabrication facilities it will need to do so, he added.

At present, AMD holds only 7% of that market, according to Mercury Research in Scottsdale, Ariz. Shares of Sunnyvale, Calif.-based AMD lost 56 cents Friday to close at $19.56 on the New York Stock Exchange.

Slot A processors can be used with Slot 1 motherboards, Anixter said, and that should help AMD tap into a key part of industrywide economies of scale. But in the long run, Intel's dominant position may help Slot 1 crowd out the alternatives.

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If AMD is the only company to use Slot A, said Dataquest's Reynolds, that would drive up costs of subsidiary components, such as chipsets, which will be unique to AMD's product and cut into the price the company can charge for its processors. That could make it hard to build a profitable business, he added.

"AMD and Cyrix have always had competitive products," says Dean McCarron of Mercury. "But it really doesn't fundamentally affect the longer-term issues--the competitive road map and the change in industry infrastructure."

McCarron views a shift to Slot 1 as the dominant PC architecture as almost inevitable, given Intel's market share. If this happens, he said, "the momentum that AMD and Cyrix have in the Socket 7-based market goes away." And AMD's Slot A strategy to gain market share becomes more difficult.

It's that degree of market power that drives the FTC investigation, McCarron said.

Intel's central processor dominance--and its extension into motherboards, chipsets and other PC categories--strongly resembles Microsoft's situation in the software market. But given the possibility of competition in Slot 1-based products, plus the chip maker's more cautious posture toward antitrust problems, some industry watchers don't see the two situations as precisely parallel. They suspect that any government action will fall short of what Microsoft has encountered from the Justice Department.

"Intel has progressively eaten up more of the PC, and while I don't think they've been gentle in that process, they've certainly been more careful" than Microsoft, said PC World's Lemmons.

Intel has assumed a relatively cooperative posture in its dealings with the government--working with the FTC and keeping its public rhetoric in check--rather than denouncing the effort and rallying public support from industry heavyweights, as Microsoft has done.

"Intel has focused on minimizing competition to the degree that they can without bringing the government on their back too hard," Lemmons said.

On Friday, shares of Santa Clara, Calif.-based Intel lost $2.06 to close at $71.44 on Nasdaq. Shares of National Semiconductor, also based in Santa Clara, closed 19 cents lower at $16.25 on the NYSE.

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Times staff writer Charles Piller can be reached via e-mail at charles.piller @latimes.com.

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