The Chips Are Down

Welcome Guest. | Log In| Register | Membership Benefits

The Chips Are Down

Intel's problems persist as IBM pulls the plug and businesses rethink PC strategies

Who was it that said there's no such thing as bad publicity? Certainly not Intel Corp. CEO Andy Grove.

The recent spate of bad press about a flaw in the company's Pentium processor has Intel scrambling to do damage control. "This whole episode has got hundreds of Intel people in contact with tens of thousands of our customers in a situation where the rubber meets the road," says Grove.

The company is directing every last employee to focus on the customer, which means thousands of workers who were set for a break during the Christmas holiday will now be on the job churning out new chip s--minus the flaw--and taking customer calls.

Problem's Intensify
Intel's Pentium problems intensified on Dec. 12 when IBM temporarily halted shipment of computers based on the chip. That decision was made by chairman Louis Gerstner himself and supported by the IBM PC Co. "It scared the hell out of us. It was an enormous decision," says Bruce Claflin, a general manager of the IBM PC Co.

IBM charges that the Pentium problem, which involves complex mathematical calculations in connection with the floating-point unit of the processor, is more serious than Intel has been telling customers. Intel says the problem might occur, in average use, only once every 27,000 years. IBM says it can occur as often as once every 24 days.

But even Intel's figure is too scary for some. While most businesses plan to continue using the Pentiums they have, half the InformationWeek 500 companies surveyed say they will halt purchases of PCs with the faulty chip.

Wall Street trader Smith Barney, one of IBM's biggest customer sites, took the processor flaw very seriously because of SEC regulations that demand an extremely high degree of computational accuracy. Shortly after Thanksgiving, IBM conducted a week-long check of 600 Pentium boxes at Smith Barney, and replaced 200 chips with new Pentium processors flown in directly from Intel manufacturing plants.

An IBM source says the remaining 400 chips will be replaced by the end of December. "The traders knew that anything they did from the time of notification of the Pentium flaw forward could be subject to a retroactive lawsuit from customers," says the source. "There was the possibility that they couldn't do any trading if the chips weren't replaced."

Caught Off Guard
Grove says he was caught off guard by IBM's decision to halt shipments. He concedes that IBM "has been a complex company to do business with. They are a competitor in semiconductors and architectures as well as an original equipment manufacturer (OEM) customer, a nd all of those relationships will continue unchanged."

Intel Corp. has spent tens of millions of dollars this year trying to make its name a household word. "In their zeal to be dominant, they've lost track of the customers and OEMs," says an executive with one PC maker. "It's time for them to do very intensive soul searching."

The handling of the Pentium bug has some customers scratching their heads. "We were bothered by Intel's attitude from the start of this," says Jim Harder, corporate director of IS at Boise Cascade Corp. in Boise, Idaho. Harder says Intel's Pentium problems couldn't be more ill-timed: Boise Cascade began shifting its PC purchases to Pentium systems about 60 days ago, and IBM's move has prompted Harder to rethink that strategy.

A holier-than-thou attitude has cost computer companies in the past. "IBM used to be that way, and they got taken down a notch," says Dick Edwards, MIS director for Wells Fargo's transportation group in Atlanta. Still, Edwards points out, Intel remains t he No. 1 chip supplier and a multibillion-dollar company. "Maybe a little of that arrogance is deserved."

Intel's Grove says he wants to change that perception. "I think [the Pentium situation] has renewed contact with individuals and heightened our appreciation for OEMs and end users of our products," he says.

But some believe it's more than arrogance that has affected Intel. An increasingly competitive market has compelled the company to condense its product cycles, resulting in lower gross margins and less money plowed back into research and development.

During the high point of demand for the 486 chip last year, Intel enjoyed 64% gross margins; today they are close to 55% and are projected to fall over the next several quarters to 50%, according to Charles Boucher, senior analyst with San Francisco consultancy Hambrecht &Quist.

Besieged On All Fronts
Intel finds itself having to fend off attacks on several fronts. On Dec. 12 a circuit court of appeals in Washington upheld an earlier ruling in a crucial legal battle with competitor Cyrix Corp., which could lead to $10 million in damages against Intel. And the company lost another hold on the PC market when earlier this year Compaq Computer Corp., the leading desktop supplier, began shipping computers using processors made by Intel rival Advanced Micro Devices Inc.

Last summer, some of Intel's biggest OEM customers campaigned to get the chip maker to relax restrictions placed on them by the "Intel Inside" marketing program. IBM and Compaq dropped the Intel logo from their machines, packaging, and promotional literature.

Compaq has already indicated it will increase its dependence on alternate chip suppliers in 1995. Rod Rockwell, system engineer at Nike Corp., Portland, Ore., says he has no concerns about using non-Intel chips. "We tested Compaq's AMD-based PC, and it works just as well as Intel chips," says Rockwell. "We'd like to see Compaq use all Intel, but if we get a cheaper processor and a good box, we'll go with it."

Still, Intel's allies are not abandoning it. Microsoft Corp. announced that its customers were unlikely to run across the floating-point problem while using Microsoft software products. Also, Microsoft says it will continue to purchase Pentium-based machines for its own internal use.

So far, none of IBM's competitors has followed its lead in stopping shipments of Pentium systems: Compaq, Hewlett-Packard Co., Dell Computer Corp., and AST Research Inc. all say they will continue offering customers workarounds or replacement chips on an as-needed basis. ( For related story, click here )

Grove says he has no plans to make wholesale changes to the company. "I don't think I want to change the essentials of the Intel culture," he says. "I think our struggle now is that our product has turned into a consumer product, whether that consumer is an IT director or a scientist at a research center, and we have to have a feel for them and communicate with them better than we have."

-with additional reporting by Bruce Caldwell and Tom Dellecave Jr.

Comments on this story?