SAN FRANCISCO -- Intel (INTC) - Get Report is spending $300 million to promote the new, high-powered Pentium III chip, twice as much as the company has ever spent on marketing any new product group. Yet despite the big bankroll, the premium chip's big splash is turning into something more like a trickle.
Intel may have won the support of hundreds of developers for its Pentium III chip, but interest from customers seems to be won at a price -- a low one. To stave off competition from rival
Advanced Micro Devices
, Intel had announced severe price cuts on all its chips except for the P3. But in the market, P3 machines are appearing at bargain prices. That might disturb investors, since traditionally Intel's newest chips have carried the highest sales prices and profit margins.
To hook consumers and developers,
Cahners In-Stat Group
analyst Max Baron says, Intel may be sacrificing margins -- temporarily at least -- on the P3.
is now advertising a full P3-powered desktop computer for $999. At that price, Intel has got to be selling the P3 for close to the price of the P2, he says.
The perception is clear in the marketplace. Bruce Duttenhofer of Marietta, Ga.-based
, said the only reason he is updating his company's desktops with the P3 is because he found it at close to the cost of the P2.
"Why not?" Duttenhofer asks. "I am purchasing new machines with the P3, but that doesn't mean I endorse it or think it's better. We haven't put it through its paces yet." Other managers were even less enthusiastic. Three said they knew little about the P3, while two said they had looked at the chip and decided that the older Pentium II was a better value.
"The P2 is working fine, along with some of the older Pentiums," says Larry Urick, director of information technology at Indianapolis-based
. "There did not seem to be a significant performance difference with the P3. I'm not looking to replace equipment with it at this time. I don't see any features there that would make me want to pay the premium price."
This ambivalence about PC chips is also reflected in Intel's stock price. After the company first unveiled the chip to great
fanfare Feb. 17, the stock climbed about 8% over the next five days. Since then, however, it has dropped 12%.
Reservations about the chip are due to its somewhat nebulous place in the technology spectrum. Some analysts say the P3 isn't a true next-generation product. Nathan Brookwood, an analyst with
, says that with a top speed of 550 MHz, it's better described as a half-generation ahead of the P2's 450 MHz.
And while the P3 includes new technology that speeds Internet use, that level of improvement won't be noticeable to the average user, Brookwood says. Even speeds of 500 MHz and 550 MHz aren't enough of an improvement to justify the official price of the chip, which is a $220 increase over the P2's $476 price tag.
Brookwood expects the current P3 to languish until Intel produces the 600 MHz P3, code name Coppermine, later this year. "At 600 MHz, you'll notice the difference," he says.
An Intel spokesman says that it's hard to gauge how well the P3 is selling currently. "It's too early in the product's life cycle," he says, adding that Intel has no plans to speed up introduction of Coppermine.
Another issue has drawn analysts' concern.
analyst Ken Pearlman says Intel's strategy behind the P3 puzzles him. Intel has focused on Internet capability, but the P3 is priced for high-end users and business customers. People who buy computers purely for the Internet often go to low-priced models, so the Internet capabilities would have made more sense on the Celeron chip that Intel makes for low-cost PCs. Oppenheimer is not an underwriter for Intel.
For the past year, AMD has been selling its 3D Now! chip, which offers the same Internet streaming capability as the P3. AMD has already sold 8.5 million 3D Now! chips, establishing a strong platform for developers. "AMD has 12 very large companies that write games for 3D Now!," says Baron of Cahners In-Stat Group.
Some analysts have given up on the P3 altogether as a driver of Intel's revenue and profit growth.
analyst Drew Peck is waiting instead for the Xeon processor for servers that Intel will launch this week. "And that's a new product we know nothing about," Peck said. Cowen is not an underwriter of Intel.
Peck's fear is that business customers will show the same level of excitement for the Xeon that Steve Lowe, director of computing and information services at
in Illinois, is showing for the P3.
Lowe maintains and upgrades a network of 250 computers on the campus. "We are constantly upgrading. But for now we are staying with the P2," Lowe says. "For the average user the P2 is fine."