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Intel Corp.

Intel Reverses Course on Pentium Chip Replacement Policy, Offers Free Replacement Parts

Strategic Insights

— 2 min read

Intel executives spent weeks insisting that the odds were 9 billion to 1 against the Pentium chip causing a mathematical error, but eventually relented to mounting public pressure and customer complaints. The company will offer all customers a free replacement part upon request, despite the potential for a significant financial hit. The decision may have a positive effect on current sales of personal computers containing the Pentium microprocessor, relieving the stress on potential customers and allowing them to purchase now with the knowledge that they can replace the flawed chips later.

Key Takeaways:

  • Intel will offer all customers a free replacement part upon request, with the company planning to charge the replacement costs against its fourth-quarter earnings, estimating a charge of more than 10 cents a share.
  • The replacement costs are estimated to be around $100 a chip, with Charles Boucher, an analyst at Hambrecht & Quist, estimating that by the end of 1994, Intel would have shipped five million Pentium processors in all.
  • The vast majority of customers are unlikely to seek replacements, with Boucher estimating that only around 20% of the chips would need to be replaced, resulting in a charge of around $100 million before taxes, or around $63 million after taxes.
  • The decision may have a positive effect on current sales of personal computers containing the Pentium microprocessor, with Seymour Merrin, president of Merrin Information Services, saying that the announcement will relieve the stress on potential customers and allow them to purchase now.
  • Intel's reversal is seen as a public relations coup, with Andrew Neff, a financial analyst at Bear, Stearns & Company, saying that the company "acted like Mr. Spock; they should have acted like Captain Kirk."

Statistics:

  • The estimated replacement cost per chip is $100.
  • The estimated total number of Pentium processors shipped by the end of 1994 is five million.
  • The estimated charge against Intel's fourth-quarter earnings is more than 10 cents a share.
  • The estimated charge before taxes is $100 million.
  • The estimated charge after taxes is $63 million.
  • The percentage of chips that may need to be replaced is around 20%.

Sources:

  • "Intel to Replace All Pentium Chips" by James Flanigan, Los Angeles Times, November 22, 1993, page D1.
  • "Pentium Chip Flaw: Intel Reverses Course" by Ken Belson, The New York Times, November 18, 1993.
  • "Intel to Pay $63 million to Replace Flawed Chips" by J.M., Reuters, November 18, 1993.
  • "Intel's Pentium Chip Flaw: A Business School Case Study" by Seymour Merrin, President of Merrin Information Services, Palo Alto, CA.

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