The Intel Pentium Chip Controversy case memo

Subject: The Intel Pentium Chip Controversy (A)

Date: March 7, 2010

In the summer 1994 a division flaw was discovered for rare combination of numbers in the floating point unit of the new Pentium chip designed by Intel. This discovery created a wave of accusations aimed at microprocessor company.

Intel was faced with the decision of whether or not to replace the flawed Pentium chips of all concerned users. The total number of faulted chips estimated to 2 million units. The main issue presented in the case is that when designed by Intel new Pentium chip was discovered to malfunction it created a wave of events not in favor for Intel. First, accusations and threats were posted on “comp.sys.intel” Internet news group. Then, series of articles published by media aimed to reveal the story of the chip flow. Followed by unexpected actions from behemoth computer manufacturers, that increased negativity around the chip flow issue. In result Intel proclaimed to replace the faulted chip only to those users who can prove their vulnerability to the error [2].

As an alternative to Intel’s solution other scenarios were considered such as

• complete replacement of all faulted chips;
• not to replace chips at all;
• deliver a new chip to those users who wants to replace their faulted chips with no question asked;

Replacing all 5.5 million [4] defective processors Intel sold in 1993 and 1994 would cost $2,200 million only for the labor and other incidental cost, averaging to $400 per chip replaced [5]. This approach is more costly that the approach Intel took initially. Besides there was a production capacity issue to produce enough processors in a timely fashion.

The decision not to replace faulted chips at all would definitely damage the reputation of the chip manufacturer. Intel already spent tremendous amount of money to promote their brand.  So it does not seem as a good alternative to consider.

I would recommend Andy Grove launching an immediate campaign using all regular media including Internet to explain the chances and possibilities of having the computation error caused by the chip. Even to dedicate a team of professionals to participate in the online discussion. These actions would calm down “flame” of accusations and threats to the microprocessor company. Social media can be very powerful tool, and can damage or improve company’s image significantly. The very first thing Intel should be doing is to address negativity against them in social media.

Because the situation already went out of control I would announce that replacement of the faulted chip to anyone who wishes to do it. Not everyone will actually request a replacement for their chip. We can use consumer rebate marketing strategy as an example. The industry’s open secret is that fully 40% of all rebates never get redeemed because consumers fail to apply for them or their applications are rejected [1]. Using my own experience I can estimate that no more that 25% of non commercial users will call for CPU replacement. Especially, if Intel would offer to make the replacement of the chip by the user itself, providing the full customer support of replacement over the phone. And announce life time replacement policy, so customers would not rush with the decisions to replace chips with a flaw. Then Intel would pay only for shipping and handling and customer service support, other than cost of manufacturing the chip. In 2002 Crystal Decisions estimated cost of their single handled call to customer service support to $20 CAD on average.  Inexperienced user can make up to 3 calls to make a replacement.

It is much harder to estimate what response would be from business users. My suggestion would be to deal with business users on case by case basis, trying to move the majority of replacement cost to the users. Most of the companies have their IT departments fully trained and capable of the chip replacement in the computers.

Basically, the longer delay of replacement the more cost effective it should be, because the price for the processors goes does down very rapidly [6].

At the time Intel can raise prices on new Pentium chip to decrease demand since production capacity did not allow Intel to meet demand until the end of the first quarter of 1995 [3].

Actions made by companies that sell computers, such as IBM and Dell, shall be addressed immediately. Those actions should not be happening without prior agreement with Intel. I would recommend finding a compromise on the raised issue, and together developing the suitable plan for the chip replacement by involved parties.

1. Brian Grow, “The Great Rebate Runaround”, Business Week Online Nov. 23rd 2005

2. Ibid., p.29

3. Carlton, “Humble Pie,” The Wall Street Journal, December 21, 1994, p.B1

4. J.J. Lazlo, “Intel Corporation-Company Report”, PaineWebber Inc., January 26, 1995, pp.7-9.

5. Brian Gillooly, “The Real Cost – Intel’s ‘free’ Pentium replacement plan may end up costing large users a bundle“, Information Week, January 9, 1995, p.34.

6. Intel Corporation Annual Report, 1994, p.14.