COMPETITION THE CYRIX ANTI-INTEL AGENTS

ALL THE CURRENT HYSTERIA about Bill Gates and Microsoft’s monopoly in the PC industry obscures who the real Goliath of the industry is-Santa Clara, Calif.-based Intel, whose revenues last year were S20.8 billion while its net profit exceeded $5.1 billion. Last year, Intel chips were in 95 percent of the computers running Microsoft’s Windows operating systems.

No other company even comes close to Intel’s extraordinary dominance in microprocessors, says Mike Griffith, a senior analyst at market research firm InStat in Scottsdale, Ariz. But several companies-including Richardson-based Cyrix Corporation-are succeeding in their efforts at prying some of the chip market from Intel’s strong grip.

At the forefront of this effort are the likes of Advanced Micro Devices of Sunnyvale, Calif., and Digital Equipment Corporation of Massachusetts, which recently sued Intel for patent infringement.

And then there’s Cyrix, founded in 1988 by Gerald Rogers and Tom Brightman. Last year,tiny Cyrix accounted for probably less than 2 percent of worldwide dollar shipments of chips, Griffith estimates. And the company-which in the past distributed to the press photos of flamboyant then-chairman Gerald Rogers with his ami around a tombstone that read” Intel Inside-RIP”- has stumbled over the years in its efforts to take market share from Intel.

But Cyrix has recently hit a few home runs in this game. When its new 6x86MX chip was released May 30, trade magazine PC World hailed it as a chip that very nearly matches the speed of competitor Pentium II-at half the price and with none of the quality problems that have plagued the Penitum II.

And just after Digital’s suit against Intel was filed in mid-May, Cyrix filed its own patent infringement suit against Intel. The suit was based on patents Cyrix received in May for technology the company says Intel has been using to create the Pentium chip. Spokesman Mark Lipscomb says the lawsuit was meant to protect Cyrix’s patents. Intel has not publicly commented on Cyrix’s suit.

The lawsuit, filed quietly in U.S. Eastern District Court in Sherman, is but the latest in a series of careful moves Cyrix has taken in its efforts to sidestep giant Intel. “We’re still not trying to go head-to-head with them,” Lipscomb says, “but the value of the company’s technology must be defended.’’ Rather, Cyrix intends to go after Intel like a David armed only with moxie-and a unique new slingshot.

THE MEDIAGX WONDER CHIP

Cyrix’s slingshot, the new MediaGX microchip, turned heads in February when the company announced an agreement to sell this new, faster and cheaper chip to another giant, the biggest desktop computer manufacturer in the world: Houston-based Compaq. The S999 Presario 2100. powered by Cyrix’s MediaGX chip, was Compaq’s first entry into the under-$1,000 desktop computer market-the market for PCs that is poised to see the biggest growth in the next few years.

Cyrix’s new wonder chip, the MediaGX, has been four years in the making, says Sieve Tobak, Cyrix’s vice president of corporate marketing. The wonder of this chip is that, while it runs Microsoft’s Windows operating system and software, it also integrates into its programming functions such as graphics and sound that ordinarily have required additional hardware components. This integrated design means that a desktop computer based on a MediaGX chip costs less to build and therefore to sell. Intel’s average selling price for its chips is about $200, according to Tobak, while Cyrix is selling the MediaGX chip for $99. February’s announced deal with Compaq rippled throughout the industry, bringing new respect for Cyrix. ’The Compaq decision was a bellwether. The saying used to be ’As IBM goes, so goes the market,’ ” Tobak points out. Compaq’s decision to use the MediaGX “says our stuff is safe.”

Compaq wasn’t the first to offer a $999 desktop computer; AST Research Inc. of Irvine, Calif., came out with a $999 model last year. But such a move by the industry leader was seen as legitimizing the much-hyped “under $1,000” desktop computer, and this move set off a competitive scramble. In-Stat’s Griffith notes that almost as soon as the Presario 2100 appeared, many of Compaq’s rivals came out with versions offering the same features, the same processing speed and the same price.

“We’re seeing a new price class of personal computer emerge.” says Dean Mc-Carron, principal of Mercury Research of Scottsdale. And Cyrix makes the chips that can power this new class of PC.



A NEW MARKET

THIS IS NOT A CASE OF COMPUTER MANUfacturers’ sudden concern for buyers’ budgets. Relentless technological change and planned obsolescence mean today’s prototypical $2,000 desktop computer, with the most up-to-date technology available, is guaranteed to evolve into a dinosaur almost overnight. So multiply that $2.000-per-computer figure by 5,000 or so machines for a hypothetical mid-size business, and the fee to stay technologically current gets very steep, even with bulk-purchase discounts.

And the industry is also running into the brick wall of price resistance from the only markets that are not yet saturated: very small, often home-based businesses, and other home-use buyers. Most desktop computer sales to business customers of any size these days are for replacements and upgrades, but as Tobak notes, almost two-thirds of U.S. homes still don’t own a desk-top computer. The MediaGX was intended to power an easy-to-operate, less-expensive desktop computer that would sell to this market.

Not only did the Compaq deal represent a move into a new market, it was also a major coup because Cyrix has struggled to win a contract from one of the major desktop makers. Compaq is the biggest; other majors include Austin-based Dell, Gateway 2000 of North Sioux City, S.D., and Packard Bell of Sacramento, Calif.

The quality of Cyrix’s technology has never been an issue-its oilier chips, designed to the Intel standard, have won consistent rave reviews from the trade press. What has kept the majors shying away from Cyrix-and AMD-is fear. Just as competitors and suppliers worry over their relationships with Microsoft, they also were and are afraid of what might happen to their relationship with Intel, the virtual sole source of their products’ key component, should they stray from the fold by switching to a different chip supplier.

“The PC makers are not in a good position with respect to Intel,” Tobak says. “Intel has a lot of leverage on them. Compaq is Intel’s largest customer, so the leverage works both ways.”

In-Stat’s Griffith agrees: “The market’s really behind in alternative sources of supply. This is not in the PC makers’ best interest. The marketplace wants to see competitors out there other than Intel.”



BEATING THE MARGINS

Cyrix understands the home- and small -home-business market very well-these home users have always been the mainstay customers for machines with Cyrix chips. Because Cyrix never had an agreement with a top-tier PC maker until this year. Cyrix has long been shut out of the corporate market, instead developing extensive relationships with the companies that custom-build desktop computers for very small businesses and home users. These distributors are known as value-added resellers, or VARs. Frequently, the VARs themselves are tiny companies, building and selling perhaps a couple of dozen machines a month.

These independents have flocked to Cyrix’s 6×86 line of chips because Cyrix has made a point of pricing all of its products so that VARs can make a profit. Tobak says. “Intel has been sucking margin out of the PC industry for years,” he notes. “Our customers like Cyrix because we give them new market opportunities and enable them to make reasonable margins.”

This approach has paid off handsomely for Cyrix: When Compaq wanted to offer a lower-cost line of desktop computers to appeal to the price-sensitive market segment, there was no feasible alternative from Intel or anyone else except the Cyrix MediaGX chip, Tobak says.

Although Cyrix is keeping the MediaGX line entirely separate from its core 6×86 product line, the MediaGX may actually help put Cyrix’s other chips on more solid footing, including Cyrix’s version of the Intel Pentium MMX chip, which has multimedia extension capabilities.

Intel’s MMX is said to improve sound and graphics in desktop computers. But when Intel introduced its Pentium MMX chip in January, many industry observers weren’t all that impressed with it. Initial buyer response to the MMX chip was tepid, probably because software designed for it won’t be available until late this year at the earliest.

Nonetheless, when Goliath makes a product move, the market follows; AMD came out with its version of this same chip in April. Intel also announced in early May the release of a Pentium II chip with MMX capabilities targeted toward corporate desktop networks. But the launch of the Pentium II was dogged with quality questions similar to the bugs found in the first Pentium chip, which caused public relations problems for Intel in 1994.

With the 6×86/MX chip line. Cyrix will attempt to compete head-on with Intel for buyers of higher-priced machines, although Intel’s Pentium II lias a unique cartridge design that will allow computers that use it to be upgraded easier. This design will make it harder, if not impossible, for computer owners to upgrade rather than buy new, thus making it hard for Cyrix and others to compete head-to-head with Intel.

Despite all the attention the Compaq deal garnered, Cyrix still needs to find top-tier manufacturers willing to put the 6×86 and MX chips into their products. This effort was helped along immensely by the positive PC World review of the 6x86MX chip and the fact that on May 30, the day the chip was unveiled, Cyrix’s stock price jumped 17 percent.

Griffith says Cyrix can use the MediaGX deal with Compaq to establish a track record as a reliable long-term source of supply. If it succeeds as a Compaq supplier with this chip, Cyrix may finally break into the top-tier manufacturers and thus filter all its other chips into the lucrative market of large corporate desktop computer buyers that has long been closed to Cyrix.

“By going through the back door and developing an entirely different processor, they [Cyrix technicians! figured out a way to establish the kind of credibility that wins contracts with major manufacturers,” Griffith says.

And while almost everyone in the desktop computer industry maintains that the near-$l.000 machines are aimed solely at home or first-time users, “(here’s no fundamental reason the same technology at the same price point couldn’t be applied to the corporate market,” notes Mercury Research’s McCarron.



THE LONG-TERM POSSIBILITIES

CYRIX, OVER THE LONG HAUL, COULD END up supplying a range of chips to serve virtually every market segment. Tobak says Cyrix does want to pursue corporate customers, but regards this as a goal of five years or longer. Tobak also says Cyrix is certain that Intel, which sinks billions of dollars every year into research and manufacturing, won’t be willing to cut its margins to compete at the low end.

According to In-Stat’s Griffith, Intel has always priced its chips with that mid-range, $2,000 system in mind. He culls it Intel’s “sweet spot.” the price point at which the chip giant makes most of its margins.

Cyrix reported a profit for first-quarter 1997 after three consecutive quarters of losses, and Tobak says Cyrix expects to continue to be profitable this year. It floundered in red ink last year due to two missteps. The first, an expensive foray into a line of Cyrix desktop computers, was quietly abandoned at the end of 1996.

The other miscue was a lot more serious. Cyrix decided to price its 6×86 chip line, which debuted in late 1995, at Intel’s price levels. According to Tobak, Cyrix believed the 6×86’s well-documented performance edge over Intel’s chips would sustain the price premium. Instead, Cyrix ran into a brick wall: a dominant competitor that had developed a strong brand identity- Pentium.

Tobak says Cyrix has learned its lesson. To win market share from an entrenched competitor, it must offer a recognizably real benefit-such as a “more aggressive” price.

Other questions remain as well. When will the company replace its flamboyant co-founder, Rogers, who resigned last December? Tobak says the company is taking its time searching for “the right individual” to take command. The newer, quieter Cyrix has downplayed personality in the executive suite, although industry analysts have credited temporary CEO Jay Swent with Cyrix’s new, more successful approach to its biggest competitor. Reportedly, it was Swent who initiated the patent infringement suit against Intel and Swent who began the strategic planning sessions that resulted in Cyrix’s focus on designing chips for less-expensive PCs.

If, in a few years, it’s possible to buy that formerly $2,000 desktop computer for half that price or even less, then consumers across the board may well be reaping the benefits of Cyrix’s end run around the Intel giant.