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Intel delays Merced chip
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May 29, 1998: 7:49 p.m. ET
Chip giant pushes back shipment of high-end chip for at least six months
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NEW YORK (CNNfn) - Intel Corp.'s plans to expand into the high profit workstation market suffered a setback Friday when the chip maker said it will delay production of its high-end Merced chip for at least six months.
The company had planned to make the chip, which it co-developed with Hewlett-Packard Co., available by the end of 1999. However, late Friday, Intel said "product management" issues would keep the chip out of production until mid-2000.
"If I were to label the issue, it's one of program management and getting all the bits and pieces pulled together in the right order," Craig Barrett, Intel's newly-appointed chief executive officer, told Reuters in an interview. "We are still very hot on the technology. I don't think a six-month slip is a major impact from a product standpoint."
Merced a key part of Intel's strategy
Intel had been banking on Merced to bring in high margins in the lucrative workstation market, particularly in light of its increasing dependence on developing chips for the sub-$1,000 PC market, for which margins are significantly lower. Prices for computers with the Merced chip are likely to start at $10,000.
"From Intel's perspective, this is a new market they're trying to enter that has high margins," said David Powers, an analyst at Edward Jones. "They need to be successful in order to offset the low-end market."
The delay is also bad news for workstation manufacturers. Several companies, including Sun Microsystems Inc., Digital Equipment Corp. and Silicon Graphics Inc., have already agreed to support the Merced chip in their units.
"It's a negative for companies that will incorporate the product into their workstations and servers," Powers said. "New product cycles are the lifeblood of the technology industry."
Merced's delay also alters Microsoft Corp.'s timetable for Windows NT, its high-end operating system designed for corporate enterprises. Microsoft has been developing a 64-bit version of Windows NT, which is designed to take advantage of Merced's 64-bit design and had planned to time the release of 64-bit Windows NT with the release of Merced.
Delay won't hurt Intel's 1999 results
But Jonathan Joseph, an analyst at NationsBanc Montgomery Securities, said the delay's impact won't be significant because the market won't be ready for a 64-bit chip by 1999.
"There are no applications for a 64-bit architecture," he said. "Have you ever known Microsoft to have a product out on time? Microsoft is not waiting for the pumpkin to arrive."
Barrett also pointed out that the mainstream computer market will be slow to adopt the new technology completely.
"You will see 32-bit and 64-bit products in parallel for five to 10 years," Barrett said. "If you look at the desktop market, by the time you get 64-bit applications on the desktop for the sort of things we do in our home, it will be some time before we get into that space."
News of the delay, which was announced after the stock market closed in New York, sent shares of Intel falling in after hours trade to 68-3/4. Earlier, Intel (INTC) closed at 71-7/16, down 2-1/16.
Intel is betting the chip, which is geared toward high-end systems for graphics and engineering professionals, will allow it to take on workstation giants such as Sun and Digital.
Powers and Joseph both said they have no plans to alter their earnings estimates of the chip giant, mostly because Merced would have had little effect on Intel's 1999 outlook.
However, with the FTC apparently ready to recommend antitrust charges against Intel, as well as pricing pressures in the computer industry, Powers noted the company's short-term prospects are difficult.
"Keep in mind that it's only a six-month delay, so it's not catastrophic" Powers said. "(But) right now there are a lot of clouds in the sky. There's speculation that their second quarter will be difficult. There's the problems in Asia and the sluggish Japanese economy. A lot of things don't bode well in the near term." 
-- from staff and wire reports
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Intel Corp.
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