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Saturday, September 09, 2006

Weekend Edition: A More Profitable Intel Ain’t Good For Dell

Stocks: (DELL)(INTC)(HPQ)(GTW)

All the stories were true. Intel cut and cut deep. The world’s largest chip company will cut over 10,000 of its 100,000 employees and will drop cap ex by $1 billion next year. The company says that by 2008, its expenses will be about $3 billion below where they are now.

Panic, maybe. But, probably a hard recognition that the margins are moving out of the chip business as PC and server sales slow from the pace they have set the last ten years. Chips have become so powerful that many users don’t care if they get better. So, getting a higher price for a faster chip may be losing its appeal.

And, then there is AMD. The smaller x86 chip manufacturer has been taking market share from Intel with faster chips. Intel is fighting back with better chips of its own that also run cooler and use less energy, but the seesaw back and forth about who has the better technology may go on forever. Competition never drives prices up.

A financially stronger Intel, with better operating margins, is probably not good news for Dell, or any of the other companies with big PC sales including Lenovo, HP, and and Gateway. Margins mean pricing leverage. When they are low, ironically, there is a greater temptation to cut costs to drive revenue. When they are higher, it is a bit easier to negotiate hard on price.

With $3 billion of costs coming out of a $40 billion a year revenue company, Intel may end up being a much bigger pain to its main competitor, AMD. But, it could also end up being a tougher vendor for its largest customers.

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