Last year, AMD and Cyrix made major gains in the PC processor market by offering inexpensive chips to power increasingly popular low-cost PCs. Both companies will advance their product lines significantly this year, building on the positions they established in 1998 to significantly increase their unit volume. At the same time, they hope to maintain or increase their average selling prices and finally achieve profitability.

Intel's newfound aggressiveness in the entry-level processor market will make it harder for AMD and Cyrix to achieve their goals, however. In 1998, Intel's Celeron had a weak start with the cacheless Covington version. This chip's modest performance on typical business applications made it easy for AMD and Cyrix to position their chips as superior alternatives for economy systems. Intel's Mendocino, however, which brought 128k of on-chip L2 cache to the Celeron line, is much faster. Intel's recent announcement of 366- and 400-MHz Celerons-and a price of only $158 for the fastest version-turns up the heat.

To continue gaining market share, or even to hold on to what they have, AMD and Cyrix had to slash prices in response to Intel's move, making it harder to achieve the long-sought profitability. AMD is the best-positioned of Intel's competitors, since its K6-3 is ready to roll out with a 256k on-chip L2. Cyrix will be harder hit, since it cannot match Intel's clock speeds and will not have a processor with on-chip L2 cache in the first half of the year. IDT and Rise, which are limited to even lower speeds and don't yet have on-chip L2 cache, also will suffer.

Intel's aggressive Celeron strategy has its own challenges. The very success of the Celeron chips threatens Intel's more profitable Pentium II line. Because of its smaller L2 cache and slower 66-MHz bus, the 400-MHz Celeron is slower on some applications than the 400-MHz Pentium II. The difference is small, however, and many PC buyers focus primarily on clock speed. Thus, the new Celeron chips will cut into Pentium II sales. Intel presumably is willing to take this risk since Katmai, due in March, will increase the differentiation for high-end processors.

For PC buyers, this is a great situation: fast processors at low prices. For the chip makers, it is another story: Intel may have difficulty maintaining its margins, and its competitors will find it more challenging than ever to increase their volumes while remaining profitable.

— Michael Slater is principal analyst at Microdesign Resources.