Intel Sweetens Pot for PC Manufacturers

Intel Corp. apparently is offering PC makers "deals they couldn't refuse" in hopes of recapturing lost market share and reversing recent gains made by rival chip maker Advanced Micro Devices Inc.

Intel Corp. apparently is offering PC makers "deals they couldnt refuse" in hopes of recapturing lost market share and reversing recent gains made by rival chip maker Advanced Micro Devices Inc.

Spurred by fear that it was losing its grip on the PC market and hurt by sagging demand for its products, Intel went on the offensive recently to reassert its dominance, offering deals to PC makers that agree to abandon AMD products, according to observers.

A move by Gateway Inc. last week highlighted Intels recent success. The embattled PC maker said it will eliminate AMD processors from its product line in two months and rely solely on Intel for all of its chip needs.

Gateway, of San Diego, said the decision was motivated by the companys efforts to reduce operating expenses. "By limiting our suppliers, were able to eliminate some cost in our manufacturing and engineering process," said Gateway spokeswoman Lisa Emard.

Emard said she had no knowledge of any discussions with Intel that might have influenced the AMD decision.

But theres little doubt Intel had a hand in the move, analysts say.

"The only way that Gateway would publicly announce that they were using only one supplier was if that supplier gave them some remarkable pricing," said Drew Peck, of S.G. Cowen Securities Corp., in Boston. "Its pretty obvious that Intels cutting some extraordinary deals in order to get that commitment."

"Im sure they offered them a deal they couldnt refuse," said analyst Dan Niles, with Lehman Brothers Inc., in San Francisco.

Gateways decision came two months after IBM said it also will phase out AMD chips in some PCs.

John Greenagel, director of strategic communications for AMD, in Sunnyvale, Calif., said he wasnt privy to any talks between Intel and Gateway but that he suspected "Intel apparently sweetened the deal."

Intel spokesman Chuck Mulloy said, as a matter of policy, "I dont have anything to say about speculation about this transaction or any other transaction."

AMD is already struggling to weather the ongoing industry downturn that has seen PC demand drop since last fall. Last week, it said it was closing two manufacturing facilities in Austin, Texas, and laying off about 2,300 employees—about 15 percent of its global work force.

Intel has several options it can use to sway PC makers. In addition to offering lower prices on processors and their accompanying chip sets, the Santa Clara, Calif., chip maker can offer millions of dollars to support joint product advertising.

But such deals have already drawn the scrutiny of regulators. In April, the European Commission launched an investigation of "Intel Inside" marketing subsidies after rival companies claimed the chip maker "was engaging in abusive marketing practices."

Intel released a statement saying it will cooperate with the commission but denied any wrongdoing.

While Intels efforts may help it gain market share, it could hurt the companys bottom line by cutting into its profits, said analyst Ashok Kumar, with U.S. Bancorp Piper Jaffray Inc., in San Francisco. Last quarter, Intels earnings fell 92 percent compared with a year ago, and low-ball pricing could cause further erosion, Kumar said.

"The whip cracks both ways," he said.

Since 1999, when AMD released the Athlon processor—a high-end chip designed to compete head-to-head with Intels Pentium line—the companys share of the worldwide PC market climbed from the midteens to slightly more than 22 percent, according to Mercury Research, in Scottsdale, Ariz.

AMDs Achilles heel remains its inability to get its chips into enterprise systems, said Dean McCarron, an analyst at Mercury.

"Theyve done very well in the consumer market but have yet to crack the commercial market," McCarron said.