But that's doubtful, as Intel executives last week said the company will be merchandizing its new Pentium 4 processor with spending as high as peak holiday-season promotion levels.

Analysts expect Intel to exercise price cuts and incentives. Longer term, both AMD and Intel plan to increase their capital spending, despite the market downturn, with an eye toward reducing unit costs.

Intel's chief financial officer, Andy Bryant, attributed the higher-than-usual projected first- quarter expenses to the aggressive ramp of Pentium 4. He did not elaborate, but analysts have pointed out that Intel is continuing a $60 rebate to OEMs on every Pentium 4 desktop shipped, as well as a companion discount program for motherboard manufacturers and other assemblers.

Intel's Pentium 4 marketing effort could cause its first-quarter gross margins to drop to 58% from last quarter's 63%, Bryant said. Even so, Intel's margins far outpaced AMD's 44.1% in the fourth quarter of 2000, according to reports from both companies.

Sanders said AMD doesn't need to beat Intel's prices. "We can sell all the [high-end] Athlon processors we can build this year. The [value-end] Duron is already lower in price than Intel processors," Sanders said. "The only weapon Intel has is to keep cutting processor prices."

Intel can manipulate the transition from the Pentium III to the Pentium 4 by dramatically dropping the price of Pentium III processors and repositioning those devices for use in low-end PCs, said Vadim Zlotnikov, an analyst at Sanford C. Bernstein & Co. Inc., New York. This would force OEMs to use the Pentium 4 in high-end PCs aimed at the more margin-rich $1,600 to $2,000 market, he said.

"The question is whether the performance superiority [of the Pentium 4] is significant enough to actually accelerate a replacement cycle and drive new demand," Zlotnikov said. The move to Pentium 4 processors, he said, will significantly improve Intel's margins in 2001.

Paul Otellini, executive vice president and general manager of the Intel Architecture group, said Pentium 4 will enter the mainstream PC market in the third quarter, when a new, lower-priced version will be supported by a new, lower-cost Brookdale SDRAM chip set.

"Brookdale will allow us to hit a lower system price" below the current 850 chip set supporting the Direct Rambus DRAM Pentium 4 version, he said. "It's a strategy to reduce the bill of material cost [for desktop PC OEMs] to hit the market sweet spot. Obviously we have to sharpen our pencils on the Pentium 4 price range to get the volumes we want to drive."

Otellini reiterated that the Brookdale chip set for Pentium 4 will transition to double-data-rate (DDR) SDRAM "as fast as we can get it out." However, he gave no timetable for introducing a DDRBrookdale chip set for Pentium. Analysts have predicted the DDR chip set will debut early in 2002.

Both Intel and AMD plan to increase their capital spending in 2001 to keep from losing any future competitive edge. Intel surprised analysts by boosting capex plans to $7.5 billion this year from $6 billion in 2000, despite forecasting a 15% drop in first-quarter revenue and an uncertain outlook beyond that (see Jan. 17 story). AMD said it is increasing capital spending to $1 billion from $805 million last year after posting lower-than-expected results for Q4 last week (see Jan. 17 story).

Otellini said Intel's capital spending increase will spur the transition to 0.13-micron processing in fabs. The company is also building several 300-mm-wafer fabs in Oregon and New Mexico. Both investments are aimed at ultimately reducing the unit cost of chip manufacturing.

Similarly, AMD is accelerating its move to 0.13-micron processing to sometime in the fourth quarter from an original start date of next year. AMD's previously disclosed preliminary planning for its first 300-mm fab in 2004 involves very little capital investment this year, a company spokesman said.

Analysts were surprised by Intel's aggressive capex plan. Growth in the PC market is being reset from a typical compound annual growth rate of 12% to 14% in the past decade to mid-single-digit growth this year, according to Zlotnikov. "It becomes a question of will Intel have sufficient demand to really fill its fabs," he said.

Joseph Osha, an analyst at Merrill Lynch & Co. Inc. in San Francisco, echoed Zlotnikov. "We understand Intel's need to get the Pentium 4 running on a more advanced process as soon as possible, ... [but] we question whether the market for high-performance desktop microprocessors really merits the investment Intel is making."