PC makers turning to non-Intel chips

It's Intel Corp.'s worst nightmare. And it might be coming true.

It's Intel Corp.'s worst nightmare. And it might be coming true.

The sub-$1,000 PC market is not only here to stay, but PC makers are getting serious about playing big time for the low-end customer. And frequently, that means using non-Intel (INTC) processors.

Taking aim at Intel

Alternative PC processor makers stated their case at the PC Tech Forum in San Jose this week.

AMD's K6-2 (previously, the K6-3D) could turn the trickle of PC makers using an alternative processor to a torrent.

"The old rule book has been thrown out," said Mike Feibus, principal analyst at chip watcher Mercury Research Inc. "You can make money at $999 with an Intel processor, but at $799 and below, you need one of the other guys."

Last week, Packard Bell NEC Corp. announced it would use Cyrix Corp.'s MediaGX processor for a line of computers that could set new records for price -- below $600.

As the fourth largest PC maker -- behind Compaq Computer Corp. (CPQ), Hewlett-Packard Co. (HWP) and IBM Corp. (IBM) -- Packard Bell NEC's defection lent more credence to Intel rivals Cyrix Corp., Advanced Micro Devices Inc. (AMD) and even small-fry Centaur Technologies Inc.

Intel not inside
"(Retailers) recognize that it's the brand of the box and not the processor that matters," said Dan Swearingen, senior director of desktop products for Cyrix, a subsidiary of National Semiconductor Corp. (NSM)

Other challengers to Intel agree. "We have 11 of the top 20 PC makers," said Anne Camden, spokesperson for Advanced Micro Devices. "Computer companies see our value."

Parting ways with Intel can be profitable, according to Aaron Goldberg, executive director of ZD Market Intelligence Inc., sister company to ZDNN. While profit margins on low-end PCs with Intel processors can be around 15 percent, companies that use alternative processors can bump that up to 25 percent.

"Celeron is not quite the performer they want it to be, and profits continue to be elusive in the sub-$1,000 range," said Goldberg, referring to Intel's new non-Pentium chip targeted at low-end PCs.

Sub-$1,000 market rolling
In addition, the importance of the sub-$1,000 segment of the market continues to grow. This year, low-end PCs claimed more than 40 percent of the overall PC market for the first time. Goldberg expects that to top 50 percent or 55 percent by the end of year.

Swearingen agrees. "It's about feature set and price," he said. "Intel could come out with a low-cost processor that delivers. If they don't, (Cyrix) will continue to gain customers."

When Celeron debuted April 16, it weighed in at twice the price of the competition and received harsh reviews for sluggish performance. PC makers proved ready to move to the competition.

So far, Packard Bell NEC is the third of the top four PC makers to offer a non-Intel PC. The only company still pushing Intel exclusively is Hewlett-Packard. And that may be only a matter of time.

HP the next to fall?
"HP is going to be soon," said Tim Bajarin, president of market watcher Creative Strategies Inc. That's because between now and the end of July, HP will need to get the attention of retailers with a competitive low-end machine. While HP has an $800 entry in the market, it is based on the old Pentium processor -- a chip not being produced any more.

While the PC maker doesn't rely on sub-$1,000 computers, the low-cost machines do make up 10 percent to 20 percent of its sales, estimated Goldberg, the ZD Market Intelligence analyst.

Other computer makers -- mainly direct-sales companies -- are avoiding the question altogether by refusing to make low-price products.

"Dell and Gateway have drawn a line in the sand at $1,500, and they don't intend to cross it," said Mercury's Feibus.

Direct vendors take high road
"Our customers are asking for the latest and greatest technology," said Bill Robbins, spokesman for Dell Computer Corp. (DELL) "We are focused on the higher price points."

And the strategy has paid off. With its solid brand name, Dell has remained profitable even while ignoring the growing sub-$1,000 market.

Would Intel be better off doing the same?


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