US Report: Intel is lowering the boom, and the Celeron, on AMD

Two steps behind and 25 percent cheaper is the formula PC chip maker AMD has followed to sock it to giant rival Intel.

But with its revitalised Celeron chip, suddenly Intel is making it increasingly harder for AMD's retreat-and-conquer strategy to succeed.

AMD unveiled Thursday a 350MHz version of its mainstream chip, the AMD K6-2. The release is part of the company's stated goal of keeping its processor speeds a couple of steps behind Intel's high-end Pentium II chips. The theory: Most users don't need cutting-edge speed, and they definitely want to save money. "We intend to stay a step or two behind Intel's performance chips," said Dana Krelle, vice president of marketing for AMD's computational products group. "There is a sweet spot in the mainstream market -- we intend to live there."

In terms of clock speed, The K6-2 is behind Intel's top-of-the-line 450MHz Pentium II announced Monday and the previous 400MHz Pentium II. AMD's strategy has seemed to be working, too. Five of the top 10 PC makers have opted to use AMD's K6 and K6-2 chips. And IBM plans to release a computer based on the chip on Friday. That acceptance is driving impressive volumes for AMD in the retail market. In July, AMD-based computers grabbed 26 percent of that market, while Intel was limited to 62 percent, according to ZD Market Intelligence (a subsidiary of ZDNN publisher Ziff-Davis). That's a long way down from the approximately 85 percent of the overall market claimed by Intel.

But AMD's sweet spot may be turning sour in the near future. Next month, Intel is expected to drop its price on its 350MHz Pentium II next month to about $300 (£183). The cut will mean that AMD will have to drop the price on its new processor from its current $317 (£193) to around $225 (£155) to stay competitive. That squeeze will definitely hurt AMD, said Mike Feibus, principal researcher with semiconductor technology watcher Mercury Research in the US. "But that trend [toward cheaper prices] hurts Intel as well," he said.

But Intel's unveiling of more powerful Celeron chips this week, which are targeted at the lower end of the PC market, could be the greatest threat to AMD yet. The original Celeron removed the Pentium II's 512KB secondary cache, the fast memory used to speed programs, while keeping the original core processor. But the Celeron was widely seen as a lobotomised version of the Pentium II -- users complained of poky performance -- and was one of Intel's few missteps. "When Intel put [the original] Celeron out, we gained a huge advantage in the market," said AMD's Krelle.

The new Celeron chips -- called "Celeron A" by Intel -- add 128KB of memory right on the chip. The result: a 20 to 30 percent increase in performance over the older Celeron. "We consider this to be the 'good' Celeron," said Feibus, after the announcement. "The fact that Intel now has stronger products [like the Celeron] below the Pentium II makes it harder to keep the K6-2 price competitive," Feibus said. But according to Krelle, AMD plans to match Intel's price reduction, including pricing its 300MHz K6-2 below Intel's newest Celeron chips. AMD insists on comparing the K6-2 with Intel's higher-end Pentium II. The company says 21 new 3DNow! instructions speed 3-D applications, even beating out the more expensive Pentium II processors on certain 3-D games. In many situations, however, the K6-2 more realistically compares with the new Celeron or even Intel's older Pentium MMX processors. On normal floating point and non-optimised multimedia applications, both the Celeron and the Pentium II handily beat the K6-2.

Perhaps, that's one reason why AMD's major PC partners are also deciding to adopt the new Celeron. On Monday, Compaq, Hewlett-Packard, Dell, Gateway and Micron Electronics all announced PCs based on the revamped Celeron.

Both Compaq and HP, along with Acer and IBM offer AMD-based computers. Of those, only IBM has announced a 350MHz K6-2 product. "It is a matter of acceptance," said Andrew Haydn, spokesperson for IBM. "We see that our consumers are really happy with what AMD has to offer."