The Next Computer: Slow, Simple, $500

National Semiconductor deal boosts industry plans to offer low-cost Internet-surfing devices

In the realm of computers, the products on the cutting edge have always been the most powerful, most speedy, and most expensive gadgets on the market.

But that's all changing: The cutting edge may soon be defined as simple, slow, and cheap.

National Semiconductor Corp.'s agreement this week to buy chip designer Cyrix Corp. is just the latest sign of growing momentum in the computer industry to put out a $500 machine that will allow users to cruise the Internet without all the finery of today's average desktop.

Dubbed the network computer (NC), these machines are just now hitting the market from Thomson Consumer Electronics and others. They run counter to industry tradition, which is to keep prices high by building computers with faster hard drives and more memory, rather than passing on the savings to consumers directly.

But the unanswered question is: Will anyone buy these new machines?

Wait and see

National's chief executive, Brian Halla, envisions a mass market where computer manufacturers would sell 10 times the machines it currently does. Many analysts are taking a wait-and-see approach to that theory.

"So far it hasn't really been tested," says Linley Gwennap, editor of the Microprocessor Report, an industry newsletter based in Sebastopol, Calif. "There's growing interest in the $800 to $1,000 price point. It's not a huge part of the PC market, but it's growing rapidly."

The acquisition of Cyrix would allow National to meld its expertise in low-cost, low-margin chip manufacturing with Cyrix's microprocessor designs. Cyrix has been one of the leading competitors with giant Intel Corporation, but it has had neither the size nor the manufacturing facilities to compete effectively.

Better facilities

Instead, Dallas-based Cyrix was forced to rely on IBM to make its innovative chip design.

And IBM did not give Cyrix access to its most modern facilities. By contrast, the linkup with National would give Cyrix access to a just-opened factory in South Portland, Maine, which would put its manufacturing process only six months behind industry leader Intel, rather than two years. This would allow Cyrix and National Semiconductor to churn out chips fast enough to compete in the lower price range.

And by competing in the low-end part of the market, which Intel typically ignores, National has a chance to distinguish itself, analysts say.

"There's never been a major sponsor" in that end of the business, says Kimball Brown, an analyst at Dataquest Inc. in San Jose, Calif. But "there's money to be made there.... To me, there's some fascinating potential."

Competition will be brutal.

Intel typically dumps its low-end chips at cut-rate prices while bringing out ever more powerful high-end chips. On Monday, the Santa Clara, Calif, company cut prices again by a range of 10 percent to 50 percent on some of its older microprocessors.

Last year, Intel sold 84 percent of all chips and earned 92 percent of the revenues in the microprocessor market for IBM-compatible computers.

The Sunnyvale, Calif.-based Advanced Micro Devices, Inc. (AMD), Intel's closest competitor, had only 12 percent of the chips market and 2.2 percent of the revenue.

Sales of AMD's new K6 chip could boost revenues to a 3 percent share this year, estimates Kelly Henry, senior analyst with International Data Corporation in Framingham, Mass.

Intel gets new technology

But will the mainstream personal computer really get cheaper because of these reenergized competitors to Intel? No, Ms. Henry says. "You ll see a more fully loaded PC."

On the same day National announced its acquisition of Cyrix, Intel said it was buying Chips & Technologies, a San Jose, Calif., manufacturer of chips that display video and graphics on PCs.

The move gives Intel a position in the graphics market and access to technology, particularly in notebook computers, that it currently doesn't have, analysts say. Intel wants to make PC images and video photorealistic.

That technology will appear on computers in the $2,000 to $3,000 range long before it reaches the $500 machine.

TYPICAL COMPUTER OWNER: WEALTHY MALE WHO LIVES

IN THE WEST

* 35 percent of US households have computers.

* California and Nevada have the most households with computer owners.

* The South has the lowest percentage of computer owners.

* 65 percent of households with incomes over $100,000 own computers.

* 12 percent of households with incomes below $30,000 own computers.

* 46 percent of computer users are adult men; 31 percent are adult women.

Source: Dataquest