Processors Toolkit

Christmas cheer around the corner for PC buyers

Tags:
Oversupply,
Processor,
Glut,
Prices

Michael Singer CNET News

Published: 21 Oct 2005 15:35 BST

It should be a jolly Christmas for PC buyers, because an excess of chips is likely to lead to discounts, according to analysts.

An excess supply of Intel processors purchased this summer, combined with ambitions at AMD to increase its market share, could lead to price cuts of as much as 10 percent on computers over the next three months.

Is the mainstream market going to see that $100 PC that everyone has been talking about? Not quite yet, said Current Analysis senior analyst Toni Duboise. "All I can say is, watch the promotions... what you will see are extremely aggressive prices."

A recent push by AMD to sell its Athlon 64 and Turion processors could also prompt additional price cuts by Intel or PC makers in the next three months, analysts said.

AMD hit a milestone when desktops equipped with its Athlon processors accounted for 52 percent of all desktops sold in retail outlets in the US during the back-to-school selling season, according to Current Analysis statistics. The 64-bit Turion mobile chip also is moving well.

"It takes about seven to nine months to see how successful a chip is selling in the market," In-Stat principal analyst Jim McGregor said. "From a time a product has gotten out, computer makers need to test the chip and then there is a period of time where it needs to get used by the public. Well, for AMD, it's been nine months, and Turion is doing well."

Intel is expected to launch price cuts on its Pentium Extreme processors and other chips in January, according to a confidential Intel road map seen by ZDNet UK sister site CNET News.com. The document did not specify any expected price cuts in the months of October, November or December, which are big selling seasons for PC makers although generally not as robust for chipmakers.

Too much stock
So why is there an inventory glut? Partly because Intel chipset shortages that the company reported this summer forced PC manufacturers to start stockpiling in order to prepare for the holiday shopping season, Duboise said.

"The oversupply was likely in Pentium 4 processors while the shortages were in Celeron chipsets and probably mobile," added independent PC-industry analyst Roger Kay.

Some of its customers overbought in July, August and September, the Santa Clara, California-based company said during its quarterly earnings report on Tuesday. Intel's chief financial officer, Andy Bryant, said the overbought inventory included "Intel architecture" silicon and that the cost to computer makers — $100m — equalled about two days' worth of shipments.

The terms "shortage" and "oversupply" refer to two different situations. In a shortage, computer makers are asking for product beyond their allocation and the chipmaker can't supply it. Manufacturers sit with a dead PC chassis if they've already got the other system components, or just unfilled orders if they don't. The latter would be the case with Dell, which builds PCs to fit each order.

In oversupply, computer makers buy beyond their initial build plan, asking for extra parts. If Intel has the product on hand, it ships. If orders for computers never materialise, the computer makers are left with the parts, which they can move next quarter. They then build systems with parts they have rather than cut new orders to Intel.

"While computer makers can order their desktop chipsets from other vendors, the only concern would be on the mobile side, especially if you were a manufacturer that wanted to use the Centrino brand," said In-Stat principal analyst Jim McGregor. Intel's Centrino is a specific combination of a Pentium mobile chip and Intel's wireless LAN technology used in laptops and other mobile devices.

Nonetheless, because PC makers stocked up on chips in the past three months, they now are looking to use them to fill orders for new machines. Discounts are the normal method for getting rid of these chips. And to help PC makers keep their profit margins, Intel will provide "price protection" — that is, cut current prices to keep their own sales up, and then retroactively give discounts on chips bought earlier.

Dell spokesman Jess Blackburn said many factors influence Dell's pricing, noting that the company is "not going to speculate on what we might be doing over the course of the next quarter." PC makers HP, Lenovo, Gateway, Toshiba and Sony did not immediately respond to requests for comment.

"Bottom line — no one wants to be caught without product during the holiday shopping season," Duboise said.

And there is no guarantee that Intel will cut prices on chips in computer makers' inventories retroactively, Kay said.

"It's up to PC makers to move the stuff, and they may lose money by holding onto them too long, particularly if the parts are marooned on the island of obsolescence by a new generation," Kay said.