For weeks, the giant maker of computer chips has clung stubbornly - even combatively - to its position: A widely publicized glitch in its Pentium microprocessor would lead to a computing error only once in 27,000 years. A free replacement was out of the question unless people could prove to Intel they were affected by the flaw.
Tuesday, CEO Andrew Grove reversed himself and announced Intel would give any owner of a Pentium-based personal computer a free replacement chip - no questions asked.
In the end, Intel had no choice. Attorneys general in two states had called on the Santa Clara, Calif.-based company to level with consumers. IBM declared errors were far more likely to surface than Intel had admitted - and stopped selling Pentium-based PCs. A prominent consulting firm, the Gartner Group, recommended that companies delay buying Pentium PCs. Engineers and computer columnists in industry publications complained about Intel's grudging response to replacing flawed chips. More than 10,000 messages about the flaw were posted on the Internet, a global network of computers.
"Intel is being painted as the Exxon of the chip industry," says Dan Hutcheson, president of VLSI Research. in San Jose, Calif. "Eventually Exxon cleaned up the Valdez mess, but it never really cleaned up its image."
Intel's new policy is a bid to avoid long-term damage to its reputation. Today, seven weeks after the crisis erupted, Intel will run ads in major newspapers saying it wants to "sincerely apologize." It will send a new chip within 60 days, help you install the chip yourself or pay to have someone do it for you.
"To some users," Grove says. "The (old) policy seemed arrogant and uncaring. . . . We were motivated by a feeling that this (replacement of the chip) was not necessary for most people. We still believe that, but want to stand behind our product."
The price of the policy switch is unclear.
Intel said it will take a charge against earnings for the quarter that ends Dec. 31. The amount will depend mainly on how many owners of the 2.2 million Pentium PCs in use ask for a replacement. If all did, the charge could wipe out Intel's fourth-quarter earnings, expected to be $650 million before the charge.
But not everyone will seek a replacement, analysts say. They estimate the quarterly charge will be from $50 million to $300 million. Intel won't know the exact amount until early January.
Still, Wall Street was heartened. Intel's stock surged 3 to $61 1/4 Tuesday after Grove announced the new policy and the impending charge. "Rightly, analysts and investors see this as stopping the crisis," says analyst Drew Peck of Cowen & Co.
The question on everyone's mind: "What the heck took Intel so long to do this?" Hutcheson asks.
Intel's stubbornness turned what could have been a minor problem, perhaps limited to a few scientists and engineers, into a costly fiasco. "They could have avoided all this," says Richard Zwetchkenbaum, analyst at IDC in Framingham, Mass. "They should have owned the problem early on."
Intel discovered the flaw last July, but kept quiet about it. If it had revealed it then and offered to replace the chips for free, only a few users probably would have responded.
In early November, the flaw was revealed in a trade publication (see chronology, right). In subsequent weeks, the incident spiraled into a crisis, accompanied by saturation press coverage. "People are now fixated on getting a replacement chip," Hutcheson says. So Intel's delay will end up costing it dearly.
Bugs are common in all new microprocessors. "We've never had a chip without one," Grove says. Microprocessors today are dazzlingly complex. Millions of transistors, each a fraction of the width of a human hair, are packed on a silicon wafer far thinner than a razor blade. They must be manufactured in sterile, dust-free rooms. Engineers must take air showers and wear space suits before entering the room. The slightest breath can wipe out a batch of chips.
Intel's previous two generations of chips - the 486 and 386 - had bigger flaws than the Pentium. Why the reaction this time?
-- The new PC market. Intel this year has pushed hard into the home consumer market. It spent $150 million on advertising to convince home PC users, who are powering the overall PC market, that "Intel Inside" stands for computing power and quality. It dispatched people to stores like CompUSA and Best Buy to set up colorful multimedia displays and to show off the Pentium.
But the mass consumer market - and the greater media and regulatory scrutiny that comes with it - is new to Intel. It's a company that has marketed mostly to computer manufacturers in the past. It's also a company steeped in an engineering tradition where hard data win above all else. "Intel entered a whole new game of consumer marketing," Zwetchkenbaum says. "The communications requirements are vastly different."
Grove acknowledges that now. "We pulled out data and tried to convince millions of home consumers. But in the process, we . . . were seen as saying, `We know what we're talking about, this is not a problem, go ahead and buy it' (despite the flaw). We in effect made the decision for the consumer. That was where we erred." That inspired anger among columnists, PC users - and consumer watchdogs.
"After an enormous marketing blitz to sell the product, there should be just as serious an effort to provide users with . . . what they originally paid for - a chip that works," Connecticut Attorney General Richard Blumenthal wrote in a letter to Grove.
-- Competitive fury. IBM really socked it to Intel. "It was clear that two weeks ago, the number of calls we were receiving (from Pentium PC owners) was declining," Grove says. "All that changed when IBM announced (Dec. 12) that it was withholding shipments of computers."
After some complex calculations, IBM announced the chances of getting an error from the Pentium chip were much higher than Intel claimed - once every 24 days, not once every 27,000 years. "We still strongly dispute IBM's findings," Grove says. "We hope to convince them, engineer to engineer, that they're wrong."
Who is right? It's not clear. But some analysts suspect industry politics are at play. Top PC makers, such as IBM and Compaq, have been chafing at Intel's dominance of the microprocessor market. Intel accounts for about 80% of PC chip sales. PC makers have long worried that Intel might reduce their supplies of chips. So PC makers increasingly are using 486-level chips from other companies. Advanced Micro Devices and Cyrix are rushing to start producing Pentium-level chips next year. IBM, with Motorola and Apple, developed the PowerPC chip, a major Pentium rival. Some analysts think IBM took the opportunity to worsen Intel's plight.
With its new policy in place, Intel hopes the crisis will fade away. The episode has made people around the world question the reliability of its chips. Companies, research organizations and others reported faulty calculations. Some simply are turning off their Pentium PCs. On the Internet, people debate whether Fidelty Investment's widely reported miscalculation of a dividend payout for its Magellan Fund was the result of a faulty Pentium. (That doesn't appear likely).
Grove says Intel has documented only one case where a company experienced a flawed calculation in everyday PC use. Still, the episode has shaken him. "I feel personally responsible for the decisions," he says. "These are harsh lessons to learn. We made a lot of mistakes. But we can't replay history."
He's glad Pentium PC sales have not been seriously affected - at least not yet. Though corporate buyers are concerned about the glitch, they had yet to become big buyers of Pentium PCs when the flaw was publicized. As for home consumers, only a few retailers have reported a drop in sales.
A survey of 1,005 adults by Computer Life magazine found only four of 10 people who p
