Is bad news for Intel good for PC buyers?

By Richard Morochove

First published June 4, 1998

Poor Intel! Or can an enormously profitable megacorporation ever be considered poor?

Last week it announced the postponement of the delivery schedule for its next-generation processor and news leaked out about cut-rate prices for its new Celeron processor. This follows hard upon an earlier announcement that the chip-maker plans to cut 3,000 jobs by attrition.

If that isn't enough bad news, there are persistent rumours the U.S. Federal Trade Commission (FTC) will soon file an anti-trust lawsuit charging that the world's largest processor manufacturer used its market dominance to abuse its rivals.

What does all this mean for PC buyers?

Intel's first 64-bit microprocessor, code-named Merced, will be delayed by at least six months. Now the new chip won't ship in volume to computer makers until mid-2000, although Intel originally planned to start large-scale deliveries next year. Intel said it recently completed a review of the Merced project and realized it had underestimated the time it needed to develop the new 64-bit chip architecture.

Merced is designed for high-end computer workstations and servers, so this delay shouldn't have any immediate impact on the market for home PCs. In fact, it will encourage Intel to speed up improvements in its Pentium II line of processors, which uses more established 32-bit technology. Intel may fill the void left by Merced's delay by advancing the release of a new chip code-named Tanner, a 32-bit processor which will fit into the 64-bit slot that will be used by Merced.

The delay means that Merced likely won't move into the mainstream PC market until 2002 or later.

This could hurt computer makers that plan to rely upon Merced, such as Hewlett-Packard, which co-developed the chip with Intel and plans to use it to replace its PA-RISC (Precision Architecture - Reduced Instruction Set Computing) chip.

The Merced delay could also affect Microsoft's release of a new 64-bit version of its Windows NT operating system. Microsoft had planned to co-ordinate the release of the operating system with Merced's launch. In March during WinHEC (Windows Hardware Engineering Conference), Microsoft announced that it already had a 64-bit version of Windows NT running on a Merced emulator.

Conversely, the delay could help computer makers who use rival processors to serve the high-end PC market, such as IBM and Apple with the PowerPC processor, Digital Equipment and its Alpha chip and Sun Microsystems' SPARC processor.

Intel also has trouble brewing at the low-end of the processor market, for chips used in the sub-$1,500 PCs that are very popular with first-time computer buyers. Intel let chip-making competitors such as AMD (Advanced Micro Devices) and the Cyrix division of National Semiconductor walk away with the low-cost processor market last year.

Intel's aimed its much-touted Celeron processor at filling this important gap at the low end. Yet according to at least one benchmark test, Intel's chip isn't as fast as its competitors.

Celeron has turned out to be the Godzilla of processors: a big promotional buildup was closely followed by a letdown as it becomes apparent it lacks staying power in the marketplace.

One month after Celeron's release there are reports Intel has put it on a fire sale, selling the chip to Taiwanese computer makers for as little as $75 (U.S.), half its original price.

Look for Celeron-based PCs from name brand computer makers to become more affordable when new models are launched mid-month, timed to coincide with the availability of Microsoft's Windows 98.

Intel supplies more than 80 per cent of the processors used in personal computers worldwide. The U.S. Federal Trade Commission has been investigating Intel's business practices for months and is rumoured to be considering filing anti-trust charges.

It is expected that the proposed lawsuit will allege that Intel illegally withheld technical information about upcoming processors from four companies involved in patent disputes, including Digital Equipment and Intergraph Corp., a workstation manufacturer. This made it difficult for the companies to plan ahead for new computers using Intel's chips.

An additional charge may be filed, accusing Intel of predatory pricing practices. Yet if Intel has slashed Celeron prices prematurely due to competitive forces, can the company really be in control of chip pricing?

Another FTC investigation of Intel in the early 1990's ended without the filing of any charges.

If the FTC goes ahead, this would extend the anti-trust battle against the informal Wintel (Windows-Intel) alliance to a second front, matching the U.S. Justice Department's recent anti-trust suit filed against Microsoft.

These recent developments, though troubling, have elevated my opinion of the management capabilities of Intel's chairman Andy Grove. Recently, Grove displayed perfect timing by turning over the reins of CEO to Intel's president Craig Barrett.

Now, Grove spends his time on the cocktail and charity benefit circuit. Sounds like a lot more fun than making chips and fighting off the FTC. CW