Wednesday May 10, 6:38 pm Eastern Time
Another Black Eye For Intel
By Lisa DiCarlo
Intel keeps getting black eyes, the result of self-inflicted wounds.
Intel (Nasdaq: INTC - news) said today that it would replace up to 1 million
defective motherboards, PC circuit boards that contain the processor,
memory, chipset and graphics. The defect is with something called a memory
translator hub (MTH), which enables communication between a type of memory called SDRAM
and a chipset called the 820.
The defect causes data corruption, the worst kind of bug for any customer because it means that a
user's personal data on a PC are completely unusable.
Compaq Computer (NYSE: CPQ - news) and Dell Computer (Nasdaq: DELL - news) say they are
not affected by the bug since they didn't buy these particular motherboards. But Hewlett-Packard
(NYSE: HWP - news) used the MTH in some models of its Kayak XM 600 workstations, which
are used primarily by engineers and other high-end business users.
Intel's replacement costs could be in the hundreds of millions of dollars, depending on how many
users request a replacement. This could have a material impact on earnings, but spokesman
Howard High says it's still too early to tell. At least one Wall Street analyst, Joe Osha of Merrill
Lynch, isn't concerned about the financial impact, because even hundreds of millions of dollars in
costs won't damage Intel, which is approaching $30 billion in sales a year.
The MTH problem is just the latest in an 18-monthlong string of Intel problems, including chip
shortages, bugs in chipsets and continuing obstacles to advancing the PC industry to
next-generation memory called RDRAM. The problems are bad news for Intel, but music to
competitors who have come to pick up the pieces.
One obvious beneficiary has been Advanced Micro Devices (NYSE: AMD - news), which earlier
this year scored microprocessor supply deals with big-name PC makers like Gateway (NYSE:
GTW - news) after Intel could not meet their demand. Sales of AMD's Athlon processor have
been so good that the company's stock--which was stagnant for years--has quadrupled in the past
several months after it managed to string together a few consecutive profitable quarters.
Intel's follies have also been a boon for ServerWorks, a privately held server infrastructure
company formerly called Reliance Computer. The company makes high-performance chipsets for
Reliability and supply problems with Intel's server chipset products have made Dell Computer
(Nasdaq: DELL - news), formerly a primary customer of Intel's server chipsets, a big ServerWorks
customer, sources say. Dell uses ServerWorks products in many of its PowerEdge servers.
Chipsets are a set of processors that work with the main microprocessor. They enable
communication between the microprocessor and other components, such as memory, graphics
The embarrassing blunders are surprising for a company that in the past was famous for
ultrasmooth execution. So what's the problem?
Part of it may be that Intel embarked on a new capital spending plan under CEO Craig Barrett.
Last year, Intel spent about $3.3 billion on chip-making equipment and fabrication plants. That's
about $1 billion less than it spent in 1997.
``They thought they could spend less and still do well,'' says Osha, who says he believes that Intel
doesn't have any fundamental execution problems.
Intel has apparently seen the error of its ways and has almost doubled its capital spending to $6
billion this year.
Another issue, says Intel's High, is that semiconductors are supercomplicated and becoming more
so every day. It's just plain hard to build and test for every possible error on a chip that has
hundreds of millions of transistors. High acknowledges problems with other versions of the
800-series chipset and says there were also lots of bugs with the previous series of chipsets, the
400-series. He says that switching to a new technology usually brings problems.
So using that logic, early-adopting customers and investors should probably be concerned about
bugs later this year when Intel introduces two completely new microprocessor platforms: one for
servers and one for desktops.
High says that Intel stands behind its products and that it decided to replace the motherboards one
day after it duplicated the bug in its own lab. He also recognizes that people pay premium prices
for Intel products.
``A lot of people buy Intel because it's Intel,'' says High. ``They're willing to spend more money
because it's Intel.''
That's true, but the worth of Intel's brand could easily wane if others continue to execute as Intel
continues to suffer black eyes.
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