Computers: Despite Furor, Most Keep Their Pentium Chips

By G. Christian Hill

Staff Reporter of The Wall Street Journal

04/13/1995

The Wall Street Journal

Remember the great Pentium flap? Most consumers don't.

Disclosure last November of a mathematics flaw in Intel Corp.'s flagship

microchip caused a huge uproar over the company's handling of the problem.

It also led to a $475 million charge to Intel's earnings after the company

eventually agreed to a no-questions-asked return policy.

But since Intel's capitulation last December, consumers -- the people who

own more than two-thirds of an estimated 5.5 million defective Pentium

computers -- have for the most part passed up the chance to get new chips.

Only 1% to 3%, at most, are seeking replacements, industry executives

estimate.

The folks who own the rest of the machines are major financial institutions

and other heavy-duty corporate computer users. Most of them have large

staffs assigned to handle matters like replacements and probably have the

most to fear from mathematical errors. They appear to be returning chips on

roughly 25% or so of the Pentium-based PCs they own.

Intel won't disclose figures, but data from personal-computer makers and

retailers indicate the combined total return rate is less than 10%, or an

estimated half million chips, compared with some predictions of about 25%.

What are the lessons in this? For one thing, it means that most PC owners

have come around to Intel's original view -- that the problem is not worth

the trouble of installing a defect-free chip. It was Intel's imperious

attitude, not the defect, that concerned them.

It follows that Intel could have saved hundreds of millions of dollars by

immediately adopting a no-questions-asked policy rather than waiting. The

overall low return rate may allow Intel to reverse part of its $475 million

charge, though the company declines to comment on that.

Packard Bell Electronics Inc., the biggest seller of Pentium computers to

the home market, had a return rate of "substantially below 1%" through

January, when it transferred the job of handling replacement requests to

Intel, says Mal Ransom, Packard Bell's vice president for marketing. Acer

America Corp., another big Pentium system player in the home market, says

its total chip replacement rate is about 5%, but the "majority" of the

requests come from corporate customers.

ARS Inc., a market-research firm that last week surveyed three of the

largest PC retail chains, found that the replacement rate for Pentium

computers for any reason was running about 3%, at the low end of returns the

chains typically experience for any computer system. Computer makers

generally give retailers an allowance of 3% to 5% for expected returns, ARS

says.

"It's exactly what you'd expect if there had been no flap at all," observes

Mike Hagan, ARS's vice president, marketing.

The much higher corporate return rate probably reflects in part how much

easier returns are for companies. Intel service companies and PC makers will

do on-site replacements for certain corporate customers, generally those

having 10 or more Pentium machines of the same type. But both generally try

to avoid making house calls for consumers unless those customers are

physically unable to do the repair themselves or to journey to a service

center. Moreover, big corporations have computer-support staffs who are

motivated to arrange for replacements to show they are on the ball.

An estimated 1.5 million flawed chips were in inventory at the time Intel

stopped selling them. Those chips are now "sequestered" in a warehouse. The

cost of that inventory accounts for about half its charge, Intel says.

Such calculations, of course, don't capture the furor's most enduring

legacy: Hardware and software companies are now much more conscious of

quality problems, and so are consumers. They also don't factor in any damage

to Intel's reputation and relations with computer makers and buyers. But

consumers' scant returns and the soaring sales of new Pentium-based

computers in the home market suggest the product's name didn't suffer much

lasting harm; indeed, some Intel executives say the affair created more

awareness of the Pentium brand than money could buy.

Intel had known about the existence of the flaw since early summer of last

year but thought the flaw was so unlikely to cause real-world errors that it

didn't disclose the problem. The company planned to fix the flaw in new

versions of the chip as its plants stepped up production. But a mathematics

professor, Thomas Nicely, discovered that the chip had caused an error in

some of his calculations and publicized the fact in a trade journal on Nov.

Intel then said it would replace flawed Pentium chips, but only if users

showed that they engaged in the kind of computer work that might encounter

errors. Internet users savaged Intel for the attitude that it knew

customers' needs better than they did. Mainstream newspapers and television

jumped on the story. Nonetheless, Intel said that concern over its

restrictive policy had begun to dwindle as computer makers and retailers

assured users that they had little to worry about.

That all changed on Dec. 12, when International Business Machines Corp. said

it was halting shipments of Pentium computers because of the flaw and that

it would replace customers' flawed machines upon request, free of charge.

IBM cited a study by its own analysts that indicated errors could occur

frequently, perhaps as often as once every 24 days on spreadsheet

calculations. That was considerably more alarming than Intel's estimate of

once every 27,000 years, or once in every nine billion calculations.

Most analysts think IBM overstated the problem. But in the face of thousands

of phone calls and pressure from other computer makers, Intel capitulated on

Dec. 20.

Andrew Neff, a chip analyst for Bear Stearns & Co., asserts the Pentium

furor "was much ado about nothing," and says his in-laws "provide a good

picture of how consumers perceived this." Mr. Neff helped buy them a

Pentium-based computer last year, and "they became extremely concerned"

about the disclosed flaw, he says. "Once Intel said you can take it back,

they stopped asking questions about it." (Mr. Neff, who does financial

analysis, did replace his flawed Pentium chip.)

Michael Slater, publisher of the Microprocessor Report, also cites hostility

toward Intel, which has long exploited a near-monopoly on chips that play

the most popular software. "Intel had an aggressive, arrogant style of doing

business that alienated a lot of people," he says. "This was a chance for

revenge."

Meanwhile, Intel is grinding up returned chips and salvaging them for

precious metals. It is still mulling over the fate of the estimated 1.5

million flawed chips it holds in inventory. Given its customers' judgment

that the flaw isn't worth worrying about, the likely outcome is going to be

wasteful.

"Someone sends me a note every day, saying I have a great idea for these

chips, asking for donations to schools and stuff," muses Paul Otellini,

Intel's vice president of marketing. "We'll probably destroy them" this

month, he adds.

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Don Clark contributed to this article.