'Intel Inside' shackles PC makers - Part 2

Continued from part 1

The source spoke from experience. In 1995, he said, IBM built several prototypes of low-cost retail and small-office PCs based on Cyrix processors. But executives scrapped the plans, in part because they couldn't leave what the source described as a "substantial" amount of advertising money on the table.

The branding restrictions go a long way toward explaining why none of the top 10 PC makers uses non-Intel chips in its business desktop lines. Nine of the 10 use non-Intel chips in separately branded systems targeted at the consumer or small-business markets. Dell Computer Corp. is the only all-Intel shop. While AMD and Cyrix have made significant strides in the retail space -- the two rival chip makers collectively account for nearly 75 percent of the chips in the sub-$1,000 PC market -- they're virtually unseen in the more lucrative corporate PC arena.

There, AMD and Cyrix have been hampered by lingering corporate conservatism toward non-Intel chips and internal business and manufacturing issues that have inhibited their ability to meet demand. But they've also been blunted by Intel's ability, through the Intel Inside program, to entice PC makers to push Intel processors harder. Take Intel's current advertising "special" for Pentium III and Pentium II Xeon processors. Intel is encouraging PC makers to spend up to 75 percent of available market development funds on print and broadcast advertising for those new processors. The normal limit is 60 percent.

Depending on the number of chips shipped to vendors, that means significantly more funds being poured into promoting new Intel chips, further propagating mind share and, as a result, market share.

This type of influence has drawn the FTC's attention as it looks into broader parts of Intel's business. Two witnesses deposed by the FTC during its earlier investigation of the chip maker said FTC lawyers asked many questions about chip pricing and the Intel Inside campaign. "The FTC is after anything that smells of monopolistic practices," said one of those deposed.

Richard Parker, who would have been lead FTC attorney in the Intel trial had the two sides not settled their initial dispute last month, declined to discuss specifics of the ongoing investigation. Parker acknowledged, however, that the FTC is using some of the information deposed from witnesses in the earlier case to look into possible anti-competitive practices. "Sometimes when you're investigating something, you notice conduct along the way that [can be put aside and investigated separately later]," he said, explaining why the FTC didn't broaden its original case.

Intel's Mulloy staunchly denied any suggestion that the company is engaging in anti-competitive behaviour through the Intel Inside program. "It is a legal, lawful program designed to support the Intel brand and generate demand for those who participate in the program," said Mulloy, adding that it is "scrubbed thoroughly" for any potential legal infractions.

Mulloy also downplayed the program's impact on competitors or PC makers. "PC makers make their own individual decisions," he said. Some PC makers, publicly at least, concur. For the record, these vendors say they've yet to stray from Intel for their business PCs not because of Intel's tactics but because corporate customers don't want them to. "There's no reason to change," said Mike Borg, PC Business Unit manager at Hewlett-Packard Co., in Cupertino, California. Corporate customers, Borg argued, are more comfortable with the Intel brand and are more concerned with quality and reliability than with low-ball pricing.

Others agree that the Intel brand resonates with corporate customers. "Intel Inside is obviously a force in the marketplace because it's perceived as the safe choice," said Will Townsend, manager of Deskpro platform marketing at Houston-based Compaq Computer Corp.

Not all corporate customers agree. "If my suppliers [Compaq and Dell] had AMD-based corporate systems, I wouldn't turn them down," said Henry Danziger, vice president of IT at Johnson Controls Inc., in Plymouth, Michigan. "But I'd want a few hundred dollars differential."

The "Intel Inside" logo, Danziger added, matters less than it did several years ago. Consistency of configuration and longer life cycles for PCs are more important, he said. PC makers' hesitance in using non-Intel chips in corporate systems could be put to the test in June, when AMD releases the K7 processor, its first chip geared specifically toward enterprise markets. Officials at the Sunnyvale, Californian company said several PC makers have been sampling the K7 since last year, but they won't identify the companies or say if they're committed to building systems around it. Companies that currently use AMD chips, such as IBM and HP, declined to comment on whether they plan to use the K7.

To make the platform more attractive, AMD is hoping to take a page out of Intel's book with enhancements to the market development program already in place with the K6. AMD officials declined to discuss specifics of those changes.

When it comes to marketing, taking on the chip giant is no easy task. Cyrix, of Richardson, Texas, toyed with the idea of a market development program in the mid-1990s. "We considered similar programs and provided funds on a case-by-case basis, but we lacked the business structure to do that," said Steve Tobak, vice president of corporate marketing at National Semiconductor Corp., in Santa Clara, which purchased Cyrix in 1997. The Intel Inside program, Tobak said, "clearly raises barriers [for competitors], although a lot of those have broken down in the consumer and small-office market."

The remaining barriers are not likely to fall until a large PC maker breaks ranks and begins using processors from AMD or another chip maker in corporate PCs. Compaq took a step in that direction last week when it announced plans to use AMD chips in some ProSignia notebooks for small and medium-size businesses. When Compaq chose Cyrix chips for a line of Presario PCs in January 1997, it validated the low-cost PC segment and gave the unofficial thumbs up to using non-Intel chips. All major PC makers with the exception of Dell have followed suit.

Until a similar event takes place in the corporate market, Intel's stranglehold in that space is not likely to weaken. And it will continue to use the Intel Inside program to keep PC makers in the fold. While Intel is certainly not the only company to establish lavish cooperative marketing programs, the FTC's Parker points out an important difference in Intel's case. "The rules that apply to a monopolist don't apply to anyone else," he said. "If there is one supplier of widgets, then you're dependent on them [regardless of] their conduct. If there are 10 suppliers and you don't like what they're doing, you've got choices."