New Pentium 4 points to PC price war

Intel will release a 1.7GHz processor on Tuesday and with it a scorched-earth approach to the PC market.

Intel will release a 1.7GHz Pentium 4 processor on Tuesday and with it a scorched-earth approach to the PC market.

The new chip, which will be featured in a number of PCs from major manufacturers, will increase overall desktop performance, especially on entertainment applications such as video encoding, according to company executives.

Equally important, though, Intel will slash the price of the Pentium 4 line and pour millions into advertising and software developer programs to ensure the chip penetrates nearly every segment of the sleepy PC market.

The 1.7GHz Pentium 4 will sell for $352 when it debuts, with PCs incorporating the chip selling for just less than $1,800, monitor included. Price cuts on 1.3GHz, 1.4GHz and 1.5GHz Pentium 4s slated for the following week will drop the base price of computers using the chip to the $1,000 mark. A little more than a year ago, 1GHz chips alone cost $1,299.

"In corporations, (buying Pentium 4 computers) becomes a no-brainer. The price moves are incredibly aggressive," said Van Baker, a vice president at Gartner. "For consumers, for the kind of applications Intel is talking about--video streaming, audio--it offers significantly better performance."

More applications also will begin to emerge that are optimized for the chip, said Anand Chandrasekher, vice president of microprocessor marketing at Intel. The company will spend roughly $500 million on promoting its technology with software developers, with most of the activity geared toward the Pentium 4 or Itanium, its new server chip. Another $300 million will go into advertising.

"Up until now, it has been consumers, but we are going to start to ramp into the corporate environment," Chandrasekher said. "The new architecture enables a significant threshold of performance."

AMD next week will provide its first public demonstration of dual-processor Athlon workstations at the National Association of Broadcasters show in Las Vegas. Dual-processor Athlon machines will come out later in the quarter, sources said.

The price cuts don't come without pain, however. The chip still costs far more to produce than the Pentium III, according to many analysts, although Chandrasekher said manufacturing costs are declining.

Rival Advanced Micro Devices, which increased market share by four percentage points last quarter, will also likely feel a price pinch. AMD CEO Jerry Sanders has said the company will match Intel pricing for chips rated at the same speed. The 1.3GHz Athlon sells for $318, which means AMD will have to chop the price 39 percent to keep pace with Intel.

The price issue will also likely not abate. Although AMD has been able to equal and even best Intel when it comes to chip design, Intel far outstrips AMD when it comes to factory capacity. By the end of the year, Intel will be producing Pentium 4s in seven plants, Chandrasekher said. AMD has two plants.

Often in the past, the production imbalance has allowed Intel to undercut AMD in volume and price.

Intel, for instance, will move to the more economical 0.13-micron manufacturing process with the Pentium 4 in the fourth quarter, a quarter ahead of AMD, and also move more quickly to use larger 300-millimeter silicon wafers, which will cut manufacturing costs by around 30 percent.

"Intel will be the lowest-cost producer, enhancing its gross margins and giving the company an edge in any price war," wrote Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray.

The megahertz gap between the two companies will also grow. Right now, AMD's fastest Athlon tops out at 1.3GHz. By the third quarter, it goes to 1.5GHz. By then, the Pentium 4 will be hitting 2GHz, according to sources.

"AMD is forced into a frequency matchup with Intel, which is beneficial to Intel," said Kevin Krewell, senior analyst with Microdesign Resources.

Then again, the Pentium 4 to date hasn't sold as well as anticipated, according to, among others, Dan Niles of Lehman Brothers. AMD's share of the PC processor market rose from 17 percent in the fourth quarter of 2000 to 21 percent in the first quarter of 2001, according to preliminary numbers released by Mercury Research.

Corporate buyers are also losing their Intel-only mentality.

Athlon "has proven itself over the past two gears," said a manager of desktop support and strategy at a large Northeast manufacturing company, who asked not to be identified. "At this point, I'm looking at it as a possibility. I'm doing some benchmarks. A year ago, I don't know that I would have considered it."

"I won't jump to Pentium 4 until the (PC) manufacturers make it attractive to me" with lower prices, he added.

Staff writer John Spooner contributed to this report.

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