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How Can INTEL Extract Higher Selling Prices?

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By alan81
April 9, 2003

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There has been a steady trend in the computer industry over the last 15 years of ever decreasing selling prices, along with an increase in market size. In order to penetrate more of the market, the selling prices must come down. It used to be common for a PC to cost over $4000, and the bottom end products were closer to $1500. Today, the bottom end products are closer to $500 and the high end closer to $2000. This has as much to do with all the other components in the system as well as the CPU. The past few years have been painful because the demand has remained stagnant, if not down while selling prices have been reduced in an effort to both boost demand and match supply with that demand. Intel has several cost reduction programs (300mm wafers, 90nm technology) on the roadmap that will reduce product cost thus improving gross margin at a given selling price.

So what is Intel doing about it?
They are attacking this problem on several fronts. I think the primary effort is market differentiation. They are designing and position products to maximize revenue from the various segments. To this end, they push Celeron for low-end desktops and Xeon for low end Servers. They have Pentium for high-end desktops and Itanium for high-end servers. They are now pushing the new Pentium-M and Centrino brand for high-end notebooks. I expect in the next year we will see a product designed to differentiate the low-end notebook from the desktop Celeron products.

The next effort is to get more Intel silicon into each PC. They have regained the chipset market with the 845 series chips, and will soon be coming out with the 865 series that should maintain a leading presence in the chipset market. Part of this push is to continue to integrate more of the motherboard functionality and devices into the Intel chipset silicon. With the new Centrino brand they are also pushing Intel wireless silicon and software into the notebook.

Another key area is pushing Intel silicon into more than just the PC client. They are now putting Intel silicon into the network infrastructure that connects the client desktop to the servers. They are also pushing hard into the mobile client (cell phone, PDA, etc...) area. The long-term vision I have is Intel silicon in the server going through Intel silicon in the network to an Intel client either on the desk or mobile. If Intel can gain some synergies through ownership of all links in the system they will be unstoppable.

One of the keys to making all this happen is having the manufacturing expertise and cost structure to make all these products cheaper, faster, and lower power than the competition. They plan to do this through the use of more advanced lithographic fab process technology. They get the capacity through their copy exactly factory strategy.

In summary, they will boost revenue through improved product differentiation and penetration into new markets, which provides more value to the customer. They will reduce costs from improved manufacturing efficiencies, which should allow an improvement in gross margins.

An improvement in the overall economy wouldn't hurt either :-)
--Alan


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