Intel Levels Pricing Between Large Volume Buyers, System Builders

Intel is reversing its practice of negotiating special pricing deals for some of its OEM customers, industry sources told CRN.

"They have completely leveled-out the pricing model," said one executive who works in the U.S. distribution industry.

The move was confirmed by sources in the manufacturing, distribution and system builder industries, but all asked that their names be withheld, since Intel has not publicly disclosed the change. It has been the subject of much speculation in the United States, though one source said it will impact mainly buyers in the Asian market.

An Intel spokeswoman declined to comment, and said Intel does not divulge communication about pricing with customers.

A vendor source familiar with Intel's pricing structure said Intel was not getting mileage out of negotiating extra discounts for some second-tier OEMs in regions outside the United States. But, because of recent price cuts by Intel, the source said base CPU prices for OEMs in the United States would be similar to what the channel can purchase through distribution.System builders contacted for this article viewed the change as good news. They are hoping that it will eliminate some of the pricing advantage larger companies were enjoying.

"I think this will be positive for the channel," said one system builder. "It looks like everyone will be treated equally."

Several system builders said they had little insight into the kind of volume negotiations that go on between Intel and its direct partners. But one system builder believed those deals are negotiated on a contract basis and that some OEM buyers were purchasing more CPUs than they could sell to get a better discount and then dumping the surplus on the gray market.

"Say they are negotiating for a-half million processors for $50 each, they will say, 'what if we take one million,' even though they know up front they won't use those chips," he said.

This source said there has been an unusual amount of activity in the gray market, particularly in the past few weeks, and he has been able to pick up retail boxed processors well below distribution cost.The system builder also believes Intel's recent price moves play into the changes. "They have already cut prices 50 percent, how much lower can they go for Dell or anyone else?" he asked. "At the end of the day, they still have to answer to their shareholders."

Intel this summer is bringing out new technology, such as its Conroe and Woodcrest processors, at price points well below previous launches to help it compete with rival Advanced Micro Devices, which has been steadily gaining market share. Additionally, Intel has said it is now able to cut prices on older chips faster because of adoption of new manufacturing technologies.

Though channel executives welcomed the price changes, they said OEMs have other advantages that tip the scales in their favor. The most significant is MDF and marketing programs, which can add up for buyers of large volumes.

Another manufacturer of custom servers said he expects Intel will still offer special pricing on large deals when it believes it can convert a new customer. These "meet-comp" programs are practiced by both AMD and Intel and help manufacturers with special pricing when they are trying to get a significant new customer onto one of their new platforms, he said.

Finally, one vendor executive familiar with Intel's pricing structure, said CPU price is just one part of overall the price of a system. He said large OEMS are negotiating volume discounts with makers of heat sinks, chassis, power supplies and other system components, which can add up to a big price differential over what system builders pay for the same products. More significantly, he said, volume buyers are getting discounts from Microsoft on the Windows operating system and Office applications. Taken together, those discounts exceed any CPU price breaks Intel might have been offering volume buyers, he said.SCOTT CAMPBELL contributed to this report

This story was updated on June 20 to reflect sources belief that the changes are for second-teir OEMs.