Snuffing Out The Competition

To many, it appears as if a monopoly company is putting an exaggerated display of vulnerability. In the battle for the microprocessor marketshare, Intel is one annoyed company today.

For years, the chipmaking giant has been sharing its new technology with its competitors, AMD and Cyrix. Till the two companies went after Intels most profitable business: high-end microprocessors.

Intels retaliation has been swift and ferocious. It has slashed its Pentium MMX chip prices up to 30 per cent in August. And again up to 40 per cent just a couple of weeks back.

In the last few months, as the new Intel gameplan has unfolded, it is clear that chip giant is on the warpath. The company intends to shut out competition completely by introducing a new proprietary design for connecting the chip to the motherboard. Will it succeed in this strategy of exclusion? Industry analysts believe it will, what with an overwhelming four-fifths of the microprocessor market share that Intel commands.

 

The pitch has been queered further with Intels recent acquisition of Digitals Alpha microprocessor manufacturing business. Intel plans to expand into all branches of computing hand-held PCs, notebook computers, desktops and the high-end server market.

Where does this leave the others? From now on, AMD and Cyrix, who between them account for the remaining 10 per cent of the PC microprocessor market, are on their own. The two companies are trying to put up a brave front. In 1997, 70 million or more of the 85-90 million PCs expected ship will use the old socket design. More than half of the shipments in 1998 will utilise the old design, says Chong Kum Shlong, marketing manager, South Asia Pacific, AMD Far East.

But what after the other half also switches to the new design?

Are the cloning battles over?

Intels battles with the clone makers have always made major headlines. Till the end of the plain vanilla Pentium neared, the clone makers traditionally focussed on the low-end market. It was a comfortable arrangement for all parties. Since the beginning of the 90s, Intel set a scorching pace, coming out with ever more powerful chips in 18 months or so. First in the market, the company would milk fabulous margins for the new chips. The first lot often sold as high as $ 1,000 a piece. Six months or so down the line, when the competitors would finally catch up, Intel would drop prices and ramp up volumes.

But when the Cyrix 686 and the AMD K6, chips that take on the current crop of Intel MMX chips were launched, they struck Intel where it hurt the most. These chips competed directly with the latest offerings from Intel. And these were priced approximately 25 per cent lower than Intel chips.

And when trade magazines screamed AMD chips better! And they are cheaper too!, Intel decided to play hardball. That is something they can afford to. In a move that almost led to Intel cannibalising its own product line top down, the company slashed prices in huge slices cuts which amounted to almost a 60 per cent drop across the board in just a single year. The most recent one, a huge cut of up to 40 per cent was announced just two weeks back.

At the same time, Intel also unfolded its new motherboard platform strategy. The strategy of exclusion would mean that while it would be tough for the competitors to beat Intel at the top end segment, they could concentrate on the low-end market for the next two years. But even here, indications are that Intel would introduce a low-cost version of Pentium II with the Slot 1 design to hound them.

The exclusion strategy

Andy Grove has time and again confessed to being paranoid about Cyrix and AMD two companies that together hold less than ten per cent of the X-86 compatible processor market. The company is scared enough to have moved quickly to exclude the two upstarts from the chip battlefields of the next century.

Most significantly, the strategy does not include beating them in speed and pricing. Intel realises that unless they changed the ground rules, the game of price-slashes would continue. The semiconductor battles of the next century will be won by a new plug design which decides how your processor will connect to the motherboard of the computer.

Older Pentium and Pentium-compatible chips from AMD and Cyrix use a connector design called Socket 7, in which hundreds of pins in intricate rows connect the processors base to the motherboard. Currently, the clonemakers can, and are making, Intel clones as they have access to the design of Socket 7. The AMD and Cyrix chips fit in neatly into Socket 7 compatible motherboards.

Intel has introduced a new socket design called the Slot 1. By end 1998 or early 1999, Slot 1 will replace the current Intel standard. This design does away with the pins which typically connect a processor to the motherboard. It replaces it with a clean, blade-like edge which will slide into a slot. It uses a long, grooved-edge connector that stands the processor upright inside a sleek cartridge. The design also uses a new system bus, which determines how data flows to and from the processor.

Intels strategy of exclusion hinges on Slot 1. The new design, which no one else has access to, will require motherboard manufacturers to design new motherboards to incorporate the new processor. The new design will first appear on the top-end processors. So the dramatic improvements in processor speed will be apparent only to those users with PCs that use the redesigned motherboards.

Intel is a major manufacturer of motherboards today. In the US market alone, one out every three motherboard comes from Intel factories. With a publicity blitzkrieg that one has come to expect from Intel, the company can create awareness levels about the new design in no time. And have PC makers and motherboard manufacturers standardise on the new design swiftly.

That scenario would, in effect, leave all other processor manufacturers without a motherboard to stick their chips into. And that will be the end of cloning.

The processor giant has gone to great lengths to ensure that the design of Slot 1 remains secret. Intel has registered the design under trade secret laws, under which the company does not have to disclose the design to anyone on the grounds that it is the companys intellectual property.

The move is clearly aimed at keeping out the competitors. Would not this provoke antitrust action from the Justice department? Intel, and industry observers believe that this is unlikely. And even the protests from AMD and Cyrix, which have said that Intel does not have a good enough reason to switch sockets, lack bite.

Intel can easily argue that the new design is a necessary step in chip evolution, and they would be right. Using the current socket design, processor speeds top out at 300 MHz, and Intel is expected to touch the roof next year. The new socket design will provide added speed.

And of course, the company is under no obligation to disclose its trade secrets to anyone. The fierce litigation with AMD and Cyrix on the MMX trademark brought home this realisation. Intel had released the MMX specifications to its competitors to establish it as an industry standard. However, when the chip was about to be launched, Intel found that AMD and Cyrix were also using the MMX name on their chips. Intel claimed that MMX was a trademark, a view that the courts more or less agreed with.

The altercation taught Intel to keep further designs under wraps, and the company specifically excluded Slot 1 when it ne-gotiated and settled patent disputes with AMD. What can stop Intel then? Currently, nothing much. The new design will introduce a sudden discontinuity in users PC upgrade paths - and more importantly, in computer makers assembly lines. But this will not be enough of an obstruction to make PC makers switch sides. PC makers have traditionally chosen to stand by Intel. With AMD and Cyrix, they have continually faced problems with shipments on schedule, or even meeting their quantity requirements.

Moreover the advertising strategies of major computer brands revolve around one theme: power and performance of their machines. No one would want to take on the Intel publicity machine touting the superior performance of the new slot design.

An industry rejection of any new standard from Intel seems unlikely. Within the next two years, the Pentium II, which currently employs the Slot 1 design, should get popular, and newer chips using the modified design would come in the market.

Over the next two years, as Intel slowly phases out Socket 7, the company would finally have what it had planned all along - complete control of the microprocessor market. The deal with Digital set in motion the other crucial element of Intels strategy to achieve the above objective.

Straddling all segments

Intel paid $700 million to Digital Equipment Corporation to buy its chip manufacturing factories. The deal also gives Intel all rights to Digitals StrongARM chips which are used in hand-held PCs and other devices like game machines. This is important because in the near future, game machines will be internet-enabled, a market with big potential. And one in which Intel had no presence until now.

Using StrongARM chips to enter the handheld PC and embedded chip market fits in neatly with Andy Grove calls the companys technology strategy for processors. He calls it multiple bifurcation wherein a single chip based on a single architecture splits production lines and specific capabilities and branches out into multiple products, and then does it even further. For instance, the latest chip in Intels armoury the Tilamook is a processor specifically designed for notebook computers. The strategy of multiple bifurcation concentrates on technological innovation and customisation of the processor. So far, every chip upgrade before the Pentium chip was just about faster processing speeds. With the Pentium Pro, Pentium MMX and Tilamook, the chip strategy has undergone a significant shift.

In each of these chips, Intel has innovated on design for only a specific product segment - Pentium Pro for workstations and high-end servers, MMX for multimedia machines and so on. So far, Intel beat competition hollow in producing more powerful chips in huge quantities. But with the focus shifting on innovating capabilities, AMD and Cyrix have shown that they can match Intel.

Hence the need for Intel to lock out competition by waging a new battle for motherboard design while it expands into all branches of computing.

In the end, where does this leave the customer? So far, pricing has dipped only when Intel was faced with competition. While desktop chip pricing goes down, Intel goes the other way with the pricing of its server chips. Thus, Pentium Pro for servers are still priced way above its desktop counterparts.

The de facto monopoly for Intel by the end of the century will mean that the downward spiralling of prices would be arrested, competitors would be hopelessly marginalised, and Intel would have an unshakeable hold in every market segment. One which even the threat of US Justice Department action dont seem to break.