INTEL'S GRIP ON PC SUPPLIERS WEAKENS
(November 4th 1994) Last month, at the ETRE chief executive's forum
in Barcelona,  officials from Intel, the world's biggest
microprocessor  supplier, got a shock. Eckhart Pfeiffer, Compaq's
chief  executive, told his strategic chip supplier that a conflict of 
interests has developed between the two companies. 

If Intel does not make changes, Pfeiffer warned, Compaq, the  world's
leading PC supplier, would buy its chips from one of the  Intel clone
suppliers. Such a move  would have a dramatic effect  on the
microprocessor industry. 

Pfeiffer has three complaints. First, Compaq gets no significant 
pricing benefits from Intel despite being its largest customer. 
Second, Intel's `Intel Inside' marketing strategy undermines 
manufacturers' efforts to distinguish their own selling points.  And
third, Intel is producing computers in direct competition to  Compaq.

Such strong and public dissatisfaction is worrying enough for  Intel
but is not its only problem. Compaq's grievances are just  one sign
of Intel's increasingly strained relationship with its  customers.
There are signs that PC makers' dependence on Intel,  which supplies
processors for nine out of ten PCs worldwide, may  be waning. 

The computer industry could now be entering a new period where 
microprocessors are sourced from a far greater range of  suppliers.

                         MARGIN PRESSURE

Money is at the root of the disharmony. Strong competition means  PC
manufacturers face continual margin pressure. Microprocessors 
account for around 30% of the component costs of a PC and, 
therefore, any savings made in this area can be substantial.  
However, Intel's dominance of the market has enabled it to secure 
its margins while its customers, the PC manufacturers, have  suffered
falling prices. Intel, they say, gives major buyers no  more than 5%
discount.

This is one of the objections raised by Pfeiffer. He argues that 
Intel volume discounts are not high enough. (For smaller 
manufacturers, the Intel policy is popular as it cuts down the 
`economies of scale' that major manufacturers can gain in other 
production areas.)

One sign of this discontent has been that, over the past year,  the
big PC suppliers have been reducing their dependence on Intel  to
secure cheaper processors. Compaq already produces PCs based  on
Advanced Micro Devices' (AMD's) 486 class of processors, IBM  has a
five year agreement to manufacture, use and sell Cyrix 
microprocessors and AST has also begun using Cyrix products in  its
PCs. There are even suggestions that Compaq and IBM are  looking at
developing `Apple clones' which would use PowerPC  chips from
Motorola/IBM. 

                       THE PENTIUM THREAT

Nevertheless, the fastest x86 processor available is still  Intel's
Pentium. But, less than a year since the introduction of  Intel's
top-of-the-range chip, a number of microprocessor  manufacturers are
preparing to launch rival high-end products.  These are likely to
undercut Intel prices and exceed Pentium  performance.

In anticipation, throughout this year Intel has been cutting  prices
on its entire range and is pushing PC suppliers toward the  highest
margin, highest powered Pentium chips.

However, this has also brought Intel into conflict with larger PC 
suppliers, such as Compaq, who face a build up of stockpiles of 
486-based PCs that are outdated by the fast take-up of newer 
Pentium-based models.

Challenges to Intel's position in the x86 processor market are 
coming from three companies; AMD, Cyrix Corp and NexGen. Each   has a
different strategy but all are confident that increased  competition
in the microprocessor market will break Intel's  domination. There is
also the threat of an IBM/Motorola PowerPC  chip capable of running
x86 applications at Pentium speeds under  emulation.

AMD's fifth generation processors will be released this month. 
Code-named the K5, it will be the first product that AMD has 
developed outside a former technology alliance with Intel. AMD 
claims the K5 performs at rates 30% higher than equivalent  Pentium
chips.

Cyrix's entry into the high-end microprocessor market begins with 
its M1 product line, due this autumn. The processor will be 
compatible with Intel boards and, like AMD, Cyrix maintains that  its
processors will perform around 30% faster than comparable  Pentiums. 

Cyrix has recently signed a five-year manufacturing agreement  with
IBM. IBM will manufacture Cyrix microprocessors and will be  entitled
to use and sell up to half of the total manufactured  output of Cyrix
designs under the IBM name. 

The newcomer to the microprocessor market is NexGen. Its 
microprocessors will compete against Intel in the high-end  Pentium
market. The company has been trying to bring x86 chips to  market for
eight years, burning its way through $70 million in  venture capital.

NexGen's top processor, the Nx586 93MHz P100, will sell at $777, 
$120 less than 100MHz Pentiums. The NexGen processors are claimed  to
be 100% compatible with Intel's but they do not fit Intel 
motherboards. NexGen says it will give the required board design 
free to developers. The NexGen range is being fabricated by IBM  but,
unlike the Cyrix arrangement, IBM is not licensed to make  the chips
for its own use. Neither has Compaq, which holds a 5%  stake in
NexGen, although it is evaluating the processor, as is  fellow
investor Olivetti. 

                            EMULATION

The main threat to Intel's continued dominance comes from the 
PowerPC RISC (reduced instruction set computer) processors, 
developed jointly by IBM, Apple and Motorola. It is smaller,  cheaper
to produce and more powerful than existing Intel  products. However,
the PowerPC's inability to run iApx 86  software has hampered sales
and minimised any speed advantages. 
These problems may be overcome by a PowerPC chip that IBM is 
currently testing. The chip, code-named the PowerPC 615, emulates 
Intel processors in hardware and runs at around Pentium speeds. 
However, sources inside IBM say there have been problems with the 
time it takes to switch between Intel-emulation and PowerPC modes  of
operation.

All these moves set the scene for a royal battle. Last month,  Compaq
released its first full line of PCs powered by AMD  processors. So
far Compaq is only testing the water at the low- end. But if it plans
a full line of machines, then other  suppliers will surely feel more
confident about following suit. 
(C) Computer Business Review