Intel Moves to Counter Erosion of Market Share
After taking a beating last year in the low-cost PC market, Intel Corp. on Monday announced faster Celeron processors and price cuts as the first steps for regaining market leadership in that fast-growing category.
“We now think we have a cost structure to address all the price segments in retail,” ultimately including sub-$500 PCs, said Paul Otellini, executive vice president of Intel’s architecture business group.
The Santa Clara, Calif.-based microprocessor giant announced two new Celeron processors running at 366 and 400 megahertz, respectively. The low-cost processor line previously topped out at 333 MHz. CompUSA computer superstores are advertising Celeron 400-based systems for $999, including monitor and printer.
Otellini was bullish on the price-reduction trend, predicting that “free PCs” will ultimately be given away to consumers in return for a contract for Internet access or other services. He said this cellular-phone-like model may fuel an explosion of new PC users.
But Intel has a long way to go to regain retail dominance given rapid gains made by competitors, particularly Sunnyvale, Calif.-based Advanced Micro Devices Inc.
Intel’s share of the U.S. retail market dropped to 55% in the fourth quarter of 1998, compared with 80% a year earlier, according to ZD Market Intelligence in San Diego. The world’s largest chip maker enjoys a 60% share of the overall market for microprocessors designed to run computers that cost less than $1,000, but this is down from 68% nine months ago, according to Mercury Research in Scottsdale, Ariz.
“They have an uphill battle,” said Nathan Brookwood, an analyst with Insight 64 in Saratoga, Calif.
For the lowest-priced systems, $75 is too much for manufacturers to spend on the processor, he said. The least expensive Celeron now sells for $71 to PC makers.
“I don’t think Intel is going to be too willing to drop down to a $50 price point,” Brookwood said. And even in the mid-range PC market, he said, “AMD is offering some pretty compelling price performance.”
Intel was slow to embrace the sub-$1,000 PC market because the processors for those machines are far less profitable than its flagship Pentium II chips. The company was leery of seeing Pentium II sales cannibalized by the Celeron. But the current strategy accepts some Pentium II cannibalization as inevitable, Otellini said.
A 400-megahertz Celeron costs PC manufacturers $158, whereas a 400-MHz Pentium II sells for $353. The Pentium II chip is only slightly faster, but other PC components typical of Pentium II-based PCs allow them to outperform Celeron-based systems.
Still, even very low-cost PCs handle most common software applications with alacrity--a phenomenon that Intel itself fostered with rapidly increasing chip speeds that gradually overtook the computing challenges posed by software programs.
Low-cost PCs will dominate the market within two to three years, Brookwood said, “and that has a pretty profound impact on everyone who touches PCs.”
“Fundamentally AMD and [National Semiconductor’s Cyrix division] will have lower overhead structures and have demonstrated a willingness to sell processors at prices and margins below what Intel will accept,” he added.
Intel will differentiate its product line by boosting the performance of Pentium II chips later this year, and will work hard at “convincing people that more performance is necessary, or trying to make it a reality,” Mercury’s Dean McCarron said.
The company hopes those efforts will preserve a vestige of its original business model that calls for ever-increasing processor speeds to fuel sales of high-cost PCs, he said.
To that end, Intel has invested in scores of developers building software and hardware applications that require more computing power--from high-speed Internet videoconferencing to advanced multimedia creation.
Intel shares rose $2.25 on Nasdaq to close at $120.81.
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