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Intel applies famous CPU price fork…

...and why the grey CPU market works

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At the end of this week, Intel will slash prices on its Celeron, PII and PIII processors by as much as 20 per cent, as revealed here earlier. The PII/333 will become one of the Intel disappeared. See our story on the 23rd of March, Intel too slash Pentium III prices on 11 April. But, in the meantime, a reader has asked us how come he can already buy a boxed retail Pentium III/500 online for $669 when its distributor list price is $696/1000? How, he asks, can he buy a single CPU for $30 less than Intel sells them by the thousand? If you press Intel on this question, as we did at its last Developer Conference in February, the slit holes at Fortress Chipzilla suddenly fill up with crossbow archers and the spin doctors start boiling up Greek (or should it be Geek) Fire. For the benefit of readers who don't understand the part manufacturers, distributors and dealers play in the food chain, here follows a small explanation of "the channel". Intel doesn't like selling direct to end users because it would have to cope with expensive logistics. It therefore sells to original equipment manufacturers (OEMs) like Compaq and to big distributors. The Compaqs and Dells of the world build the CPUs into their machine and then sell them on. Distributors, which are middlemen, have a gang of customers called dealers, which assemble PCs and sell them on to end users. OEMs and distributors get different prices from Intel, depending on their size. A large distributor in Germany, Lion, had complained that Intel appeared to be selling Pentium II processors to a big grocery chain for far less than it could buy them. The result was that his dealer base was buying PCs from the grocer, stripping them down, and re-building them. At the time, Paul Otellini, a senior Intel VP who runs the architecture division, claimed that the span of prices on microprocessors was in single figures. We found this hard to believe, but he was adamant. You will, however, recall that a couple of weeks back, Intel told the Securities and Equities Commission that nearly a quarter of its CPU sales went to two very large OEMs. Distributors and other Intel customers are notified quite early on of price changes to microprocessors. If, for example, they have bought too many Pentium IIIs and over-anticipated demand, they will seek to liberate these chips ahead of the price cut. So chips reach the grey market. Intel is well aware of the existence of this market, as are other CPU manufacturers, but it is not in its interest to stop it. That's why you can get bargains and it's also the reason why Intel doesn't make a song and dance about its price changes. It has to keep its customers (OEMs and distributors) happy, and if you, the poor end user, knew that there was an enormous price cut coming any day now, you might delay buying a new PC. And that would never do, especially as Intel's 50 per cent plus profit margins would be affected. Later this week, AMD will turn in lossy results while Intel will do, well, pretty OK. ®

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