Chip makers pinched as consumers move toward cheaper CPUs
By Matthew Fordahl
SAN JOSE, Calif. -- When Jeanette Bosio was shopping for a computer, she wasn't looking for the fastest processor, richest sound or fanciest graphics. She wanted the best price.
The $1,100 Compaq Presario 700 notebook she bought this year is good enough for her needs. It plays music, shows movies and can connect to the Internet, a requirement of her two school-age daughters.
"If it were for my business, I would have spent more," said Bosio, who owns a construction company. "For my personal use, I don't need that much. I'm a single mom, so money was an issue there."
Bosio isn't alone. The ranks of value-minded shoppers appear to be swelling, at least according to the latest financial data reported by the makers of microprocessors, the brains of PCs.
Both Intel Corp. and Advanced Micro Devices Inc. reported selling far fewer high-end processors in the second quarter than they had hoped for. Whether this is an anomaly or the start of something bigger is the subject of considerable debate.
An obvious explanation is the economic downturn and tighter budgets for both consumers and businesses.
Computer makers may have misjudged demand overall. Another possibility is that consumers see no real need to buy more performance when slower, less expensive machines handle most jobs well enough.
"The folks who are using these machines for office productivity, e-mail, surfing the Web over a dial-up modem, decided in many cases that the lower speed machines are more than adequate for their needs," said Nathan Brookwood, an analyst at the research firm Insight 64.
Despite chip makers' spending on TV, radio and print ads that feature the latest benchmark tests, space aliens or even dancing clean-room workers in bunny suits, Bosio said she paid little attention to processors in her hunt.
Instead, she consulted with friends and looked for a machine that could handle her needs. She ended up buying her Compaq laptop at the Costco store in Salinas, 60 miles south of San Jose.
Bosio's machine runs on a Duron processor, AMD's value line introduced in 2000 in part to compete with Intel's Celeron brand, which debuted in 1998.
The companies created the inexpensive lines as a way to separate their value and high-end offerings. Now, however, high-end Pentiums and Athlons are finding their way into inexpensive systems as the companies continue to lower prices as they introduce faster models.
That can pinch the bottom line, because chip makers generate more cash and profit from high-end processors than lower-end models.
AMD was hit the hardest. In the second quarter, it twice scaled back its revenue forecasts, blaming both weak demand and a shift in the mix.
AMD eventually posted sales of $600 million, down from original estimates of $820 million to $900 million. It posted a loss of $185 million.
Intel's story is murkier. The world's largest chip maker said its product mix shifted during the quarter to lower-end Celeron chips.
A full 35 percent of the desktop processors Intel shipped in the second quarter were for value systems -- up from 30 percent in the first quarter and "a pretty big shift," according to Eric Ross, an analyst at Investec Inc.
That was a "blip" that will have no impact on Intel's bottom line over the long run, says Louis Burns, general manager of Intel's Desktop Platform Group, acknowledging that a large move toward less-expensive chips "would be a big concern."
Then again, second-quarter numbers might have been skewed not by a shift in customer demand but by the fact many computer makers had expected sales to show more improvement.
"There were a lot of manufacturing-oriented decisions rather than consumers going out in droves and buying the cheapest PC they can buy," McCarron said. "They weren't buying anything."