Is Intel aiming for the wrong market?

Why is Intel charging corporate prices for a chip whose main draw is for consumers?

Intel Corp.'s newest chip, the Pentium III, boasts fast new multimedia instructions and memory enhancements that make the latest consumer applications -- such as DVD playback in software, 3-D games, and surround sound audio -- a snap.

But the chip will cost, to start, probably in the $500 (£305) range, much too expensive to be used in low-end PCs. Intel's low-end chip, the Celeron, won't get the special instructions until 2000.

According to Peter Glaskowsky, analyst at chip technology watcher MicroDesign Research Inc., what's makes sense for the market, doesn't necessarily make sense for Intel. "(The instructions) are new. They make the chip bigger and more expensive. Where else could they introduce the part?"

The 70 new multimedia instructions -- called streaming SIMD extensions, or SSE, by Intel -- make up the lion's share of the difference between the Pentium III and its predecessor, the Pentium II. They also mean that PCs with the new chip will hover around a $2,000 retail price. Already, Intel's rival Advanced Micro Devices Inc. has put similar instructions -- dubbed 3DNow! -- in its K6-2 processor, which costs similar to the Celeron and comes in PCs that start as low as $500.

Tim Bajarin, principal analyst and president of market researcher Creative Strategies Inc., thought that the competition will bring Intel's prices down quickly. "We don't know how aggressive the pricing is going to be on the Pentium III," he said. Intel may not be in a hurry to cut prices, however.

Comments made by Paul Otellini, vice president and general manager of the architecture design group, at the Pentium III Preview Day indicate the company thinks there is a market for Pentium III PCs that cost more than $1,500. "You will see a bimodal distribution," said Otellini, an official-sounding way of saying demand curves will look like a dromedary, with a hump at the low-end and a hump at the high-end.

The trend shouldn't affect Intel's profits, said Otellini, who noted that the average selling price of Intel processors has remained stable for the last five quarters.

All that pricing stability makes Intel's bet for a hot PC for Christmas 1999 -- a 450MHz Pentium-III PC -- an expensive proposition.

Take me to the Pentium III Special.