Intel to cut prices - desperate times for AMD

While PC chip giant Intel Corp. continues to pressure rival Advanced Micro Devices Inc. -- Intel will cut Celeron prices next month -- AMD is looking to escape at the end of the June, when it releases its next-generation K7 processor.

"What we need to do is add solutions from the bottom on up," said Scott Allen, spokesman for AMD. "Initially, we are talking about high performance desktop systems." Later, business systems and servers that use multiple processors -- each of which can be sold for more than $1,000 (£610) -- are possibilities. That could help Advanced Micro Devices Inc. get out of the punch-drunk daze of where it is today, with average selling prices of its processors bottoming out in the $70 range and pressure from Intel mounting.

On Thursday, sources confirmed that Intel has scheduled to cut prices on its low-cost line of processors by 6 percent to 21 percent effective June 6. The price of its top-end 466MHz Celeron will drop 13 percent to $147, while its 433MHz Celeron processor will fall 21 percent to $113. Intel's 400MHz and 366MHz Celeron processors will drop to $93 and $69, respectively.

While AMD stresses that its price cuts earlier in May take into account Intel's long-scheduled move, the company find its position in the low-end market more problematic than ever. "Intel's average selling price for the Pentium II and Pentium III are in the $200 to $300 range," said Mike Feibus, principal analyst with chip market watcher Mercury Research Inc. "That's a far cry from where AMD is now -- in the low-70s."

To survive long term, AMD has admitted that it needs to get the average selling price, or ASP, of its chips in the $100 range -- something that it has failed to do for some time. "It's no secret that our ASPs are not where we would want them to be," said AMD's Allen. "Certainly, we will do no better than $78 [this quarter], given the pressure in the marketplace." In other words, while it fights to maintain its market share at the low-end, AMD needs to grab PC power users, who will pay extra for top-of-the-line technology.

Enter the K7.

The next generation processor -- due out at the end of June -- gives AMD a six-to nine-month lead over Intel in terms of mainstream PC performance, said Mercury's Feibus. Breaking into that market has its own rewards -- namely, the ability to charge higher prices. Feibus estimates that K7 prices will be somewhere between $200 and $300. If AMD can maintain those prices, and grab an additional 15 percent to 17 percent of the mainstream market, it should be able to reach its Holy Grail of $100 average price. Technically, the K7 looks like the processor to do that, said Feibus. "Everything we have heard out there about the K7 makes it sound like a good contender. In time, they will be able to make some in-roads [into Intel's markets.]" he said.

However, there is a major drawback to AMD's ambitious plans, said Peter Glaskowsky, senior analyst with chip technology watcher MicroDesign Resources Inc. Pointing to a string of manufacturing problems, Glaskowsky stresses that the company has to overcome its own jinxed history. AMD is planning to release the K7, make the chip even smaller (and therefore, cheaper), and then add copper-wire technology to speed it up.

A recipe for success? More likely, a recipe for disaster, said Glaskowsky. "Every new thing they do is another chance for them to fail to execute," he said. "That's unfortunate, but I don't think its an unfair evaluation -- they have failed to deliver many times before."

When the original K6 hit the market, AMD had trouble delivering the chip in large quantities. Late last year, the company had trouble delivering significant numbers of its top-of-the-line K6-2 chip. That has led to a string of bad quarters -- over the past two years AMD has recorded only two profitable quarters. This quarter is not expected to be any different.

Feibus believes that its crunch time for the chip maker.

"It will be the fourth quarter by the time the K7 will make a difference," he said. "The question is -- with their profits and cash flow as it is -- can they do get profitable in time?"

Take me to the Merced Special.