Intel's Lead Gets Crimped by Competition

Innovative microprocessor manufacturer finds it progressively harder to stay ahead of the pack

IT is tough being king of the hill.

Intel Corporation, which has made a fortune off of its dominant line of computer microprocessors, is increasingly the target of several challengers. Already, these companies have begun to probe the cracks in Intel's armor.

``It's an incredible burden - in a sense - to have been as successful as Intel has been, because they have to keep up their historical performance to keep Wall Street happy with them,'' says Michael Slater, publisher and editorial director of Microprocessor Report in Sebastopol, Calif. ``There's little doubt their profit margin goes down and their market share can only go down.''

The challengers fall into two camps. The first include some well-funded computer companies, such as IBM, Digital Equipment Corporation, and Motorola, who are promoting alternate chips around which to build a whole new personal computer. The second group, including Advanced Micro Devices (A.M.D.) and Cyrix Corporation, are building microprocessor ``clones'' that mimic the Intel chip.

In the long run, the first group represents the bigger threat to Intel's dominance.

But the clones are catching up. When Intel came out with its 386-class chip in 1985, it had six years to earn hefty profits before a rival chip appeared. With its faster 486 line, Intel got four years before a rival appeared. Now, another challenger is promising to build a rival to Intel's new Pentium chip only a year after Intel came out with it. If tiny Cyrix can deliver its M1 chip, it would be a big blow to Intel.

``Certainly, today we have to exist within the shadow of Intel,'' says Bruce Burkhardt, director of strategic marketing at Cyrix. ``We're going to have to fight those monopolistic trends for the next several years. But clearly, the dam has been cracked and water is flowing through it.''

IBM builds its own 486 line and has an estimated 20 percent of the market. But the chips are strictly for its own computers.

While Intel's gross profit margins are likely to go down, analysts doubt that any of the rival chip-makers can displace Intel in the high-performance, high-margin chips. A.M.D. has pushed Intel completely out of the 386 market, but the chip's profit margins and potential are low. Now that A.M.D. and Cyrix are marketing 486 chips, analysts expect Intel to slash 486 prices. Last week, the company announced an aggressive 18.2 percent price reduction for its highest-speed 486 chip. It reduced Pentium prices 13 and 14 percent too.

``I think we're accelerating the rate of technology deployment and others are struggling to keep up with that rate,'' says Paul Otellini, senior vice president of Intel's microprocessor group. ``In a year when there was `significant competition,' Intel gained share.'' For what consumers pay for a PC today, they will be able to get one twice as powerful in roughly a year, he predicts.

CYRIX will be hard-pressed to meet that pricing challenge. Because the company only designs chips, it has to find partners to manufacture them.

Earlier this month, it disclosed that the SGS-Thomson facility making its new 486 chips was having trouble increasing production because it was getting too few usable chips from each wafer it produced.

Worse, Cyrix is embroiled in a new legal dispute with one of its main manufacturing partners, Texas Instruments. Texas Instruments has sued, saying Cyrix has not given it the chip designs promised. Cyrix has counter-sued, claiming Texas Instruments has not lived up to its manufacturing commitments. It wants a court order to stop Texas Instruments from making its 486 chips. Mel Phelps, senior technology analyst at Hambrecht & Quist, does not think the company will be able to find the advanced chip-making facilities to meet the 0.4-micron technology that Intel will begin using in 1995.

One reason Intel is able to cut prices on the Pentium is that it is moving from 0.8-micron to 0.6-micron technology and from 6-inch to 8-inch wafers. These moves allow Intel's potential yield to increase from 65 chips per wafer to 200, Phelps says.

``If they can double it again, a $600 average Pentium with enormous profits can be a $300 Pentium in '95, if they want to, and keep the same profit margins,'' Mr. Phelps says. A.M.D. is also moving to this advanced chip-making technology with its own chip facility.

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