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Intel Misjudges Transition to MMX, Resulting Price Changes Costly, but Allow Company to Maintain Dominant Position.

SUNNYVALE, Calif.--(BUSINESS WIRE)--July 18, 1997--According to a study by MicroDesign Resources (MDR), a leading information services company focusing on the microprocessor industry, unexpectedly strong demand for Pentium/MMX processors has caused microprocessor giant Intel to cut its prices for all Pentium and Pentium/MMX processors. This will result in a significant reduction of both revenue and profit for Intel through the first quarter of 1998.

Using a proprietary model of Intel's production capacity and product allocation, MDR projects that the leaked, but yet unannounced, August First Intel price cuts will result in losses close to $1 billion in net income over the next four quarters.

Intel is experiencing what industry insiders term the "Osborne" effect, after the computer maker who closed its doors after its announcement of new technology dried up demand for its currently shipping products. Intel's successful Pentium/MMX campaign, which included the industry's first Super Bowl commercial, has similarly cut demand for non-MMX Pentium processors. To address the shift in demand and keep its most popular processors in the affordable price range for mainstream computers, Intel chose to cut prices across the Pentium line.

"When you apply these price changes and run the numbers, the results are pretty dramatic," explained Linley Gwennap, Senior Analyst at MDR and Editor in Chief of Microprocessor Report. Based on Intel's sales volume, Gwennap projects that the price cuts will have a negative revenue impact of $2 billion through the second quarter of 1998.

"We think there are several motivations for these price cuts," he further explains. "First, Intel is hoping to stimulate demand for PC's by lowering the CPU cost, giving the PC buyer more bang for his buck. With a dominant 80% plus share of the CPU's in PC's, Intel will be able to use its new price structure to retain this market share by increasing PC demand."

"Then there is the competitive angle," Gwennap expanded. "By implementing these price cuts, Intel is putting pressure on AMD and Cyrix as they try and ramp up their businesses with their own versions of the x86 architecture processors, both of which were released at a lower price than Intel's x86." AMD has already responded with price cuts of its own and analysts are still waiting for a counter from Cyrix.

"We expect Intel to reduce its minimum Pentium CPU price from $106 to $93 in the fourth quarter. Pentium class processors have never been offered by Intel at this price. By reducing this low end figure so aggressively, Intel is leaving its competitors as little pricing wiggle room as possible." He concludes, "As a competitive strategy, the value is clear, but it comes directly off Intel's bottom line."

Finally, Gwennap concludes "Intel misjudged the transition from Pentium to Pentium/MMX. It's aggressive advertising and evangelizing for the new MMX technology was more effective than expected and caught Intel unprepared for the demand for the new processors. Intel has responded by shifting production in several of its fabs (even moving some manufacturing operations into its headquarters building in Santa Clara), but it will take time to complete the transition."

These conclusions were based on a MDR's annually updated model of Intel's microprocessor business. Complete results from the model are available in MDR's Intel Microprocessor Forecast, which covers in detail Intel's manufacturing capabilities, product roadmaps, and projected sales, pricing, and revenue.

MDR, with a 10-year history of tracking the industry, is considered the leader in providing unbiased analysis and insight into the PC and microprocessor industries through the publication of Microprocessor Report. The company also sponsors PC Tech Forum in May and Microprocessor Forum, featuring first disclosures of new products in the microprocessor industry, scheduled for October 13-16 at The Fairmont Hotel in San Jose, California. For more information, call MDR customer service at 707/824-4001 or on the web at: .

CONTACT: Pam Hamilton Ink

Pam Hamilton, 415/381-8198
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Publication:Business Wire
Date:Jul 18, 1997
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