Intel's Inside Track - marketing strategies; Intel Corp., Advanced Micro Devices Inc - Statistical Data Included

Brandweek, May 7, 2001

Even the most dominant brands on occasion need a wakeup call from their rivals telling them to stick to their knitting. Microsoft's came in 1995 when upstart Netscape Communications established itself as the premier Internet software company In 1993, Marlboro cut prices by as much as 40% in a bid to maintain share and kill off no-name rivals.

For computer chip giant Intel, the call came two years ago when little-known Advanced Micro Devices introduced Athlon, a 600 MHz chip that was faster than Intel's fastest, 550 MHz. Throughout the '90s, Intel's claim to fame had been that its processors were the speediest and most powerful in the PC marketplace. It spent millions on the Intel Inside campaign, inventing the notion that consumers would order a PC based on its microchip. Meanwhile, AMD lagged behind as the price-performance leader, unheard of by consumers and posing little or no threat to Intel.

The battle lines in the chip wars have changed considerably since then. Last month, Intel slashed prices up to 50% on its flagship Pentium 4 product, raising the specter of a bloody price war with its emboldened rival. Jerry Sanders, CEO of Sunnyvale, Calif.-based AMD, has vowed that his company will match Intel's pricing for chips rated at the same speed, though so far AMD hasn't followed suit. Intel's price cuts are meant not only to ward off AMD, but also to compensate for continued slowing demand in the PC market. "[Intel is] almost desperate in trying to move [Pentium 4]," said Mario Morales, program director of semiconductors research at International Data Corp., Mountain View, Calif.

The move was dramatic, but not without warning. Intel had already begun instituting price cuts on a monthly versus quarterly basis. And whereas it used to introduce new products when its warehouses were full, the company took to pre-announcing products before there was enough inventory on hand.

Intel has shown a willingness to do almost anything--boost advertising, slash prices--to ensure that Pentium 4 becomes a mainstream product, meaning 2025 million units shipped by year's end. "They're making it real easy for anyone who's about to buy a PC to buy a Pentium 4 versus a Pentium III," said Nathan Brookwood, principal of consultancy Insight 64, Saratoga, Calif. "But there are very few applications that run on Pentium 4 that don't run on Pentium III."

Brookwood said that stepped-up pressure from AMD is the reason Intel is willing to risk cannibalizing its own product line. "If AMD wasn't there breathing down Intel's neck, they would be a lot more leisurely," he said.

Despite the perceived threat, however, AMD's post-Athlon gains thus far have been modest. In 2000, AMD controlled 16.7% of the chip market, up 4.8% from 1998, per Mercury Research, Scottsdale, Ariz. At the same time, Intel's share has risen only 1 percentage point to 82.2%, as the brutal price and performance war between the two companies has driven out third-party players like National Semiconductor.

Wall Street, meanwhile, seems to have switched its allegiance. At press time, Intel's share price was on par for 2001 while AMD's was up about l00%. Analysts cited AMD's strong product line, its push into the corporate market and placement in PCs from Hewett-Packard and Gateway to Compaq.

AMD has had little name recognition outside Wall Street and Silicon Valley but that may be changing. One buyer at an online retailer said his tech-savvy customers know there's no real performance difference between the computer chips made by Intel and AMD. As a result, he said, "Intel doesn't have nearly the brand equity it did two years ago."

"The reality is that as a greater percentage of the PC market shifts toward the 'value' end of the segment, Intel's pricing and market segmentation model has come under serious pressure," wrote Merrill Lynch analyst Joseph Osha in a recent report. Osha noted that AMD sold 6.5 million processors in the first quarter, up from 5 million the previous quarter, while Intel's chip sales dropped from 29.9 million to 23.9 million during the same period. "The extremely rapid price cuts that we see for [Pentium 4] illustrate the point: Intel is having to [subsidize] demand for P4 despite the [chip's] impressive performance."

Even so, Intel's brand strength is light years ahead of AMD's. A Midwest retailer summed it up by saying that while his customers don't know computers, they know Intel. "I can't remember the last time I saw a TV ad for AMD, but everyone knows Intel," he said.

The Intel Hype Machine

Intel literally invented microchip marketing in the '90s. The Santa Clara, Calif., company steadily increased its ad spending, from a micro-like $9.6 million in 1990 to $39.8 million in 1995 to a giga-worthy $171.8 million in 1999, per Competitive Media Reporting. Intel was the first chip manufacturer to advertise directly to consumers and, in 1993, the first to give its product a catchy name, Pentium.

Intel's advertising began to shift from a technology bent to more of a brand focus with the 1997 BunnyPeople campaign, via Euro RSCG Dahlin Smith White, Salt Lake City. The ads hyped MMX, a new Pentium chip architecture that promised enhanced graphics. To illustrate the point, workers clad in bunny suits grooved to the disco sounds of Wild Cherry as their suits morphed into shiny colorful club wear. Introduced during the Super Bowl, the ads were so popular that BunnyPeople dolls became sought-after Christmas gifts that year.