Intel Partners Grapple With Uncertainty Over Cougar Point Chipset Recall

Intel's system builder partners are facing a great deal of uncertainty following the recall of Intel's series 6 "Cougar Point" dual-core chipset, which affects Sandy Bridge-based mobile and desktop computers.

In a conference call Monday, Intel said it had identified a circuit design error in its Intel 6 series chipset, code-named Cougar Point, and that it had fixed the problem. While some Intel partners are dissatisfied with Intel's handling of the matter, others give the chipmaker credit for quickly identifying and fixing the problem, and offering a timeline for issuing replacements.

Glen E. Coffield, chief executive technologist at Lake Mary, Fla.-based system builder Smart Guys Computers, said systems running the Sandy Bridge platform accounted for the vast majority of his company's recent sales.

"Approximately 80 percent of the systems sold in the last several weeks have been of Sandy Bridge construction," he said. "Most of these have been higher-end systems. Most of them are utilizing the unaffected SATA III ports for the hard drives but the optical drive is definitely hooked up to the affected ports."

Steve Brown, vice president of sales and business development at Blue Hawk Networks in Campbell, Calif., said his company is beginning to offer Sandy Bridge processors after some initial hesitation. "We're sort of tentative to jump in," Brown said. "I've been burned in the past and I want to see how new technologies play out ahead of time."

Andrew Kretzer, director of sales and marketing at Bold Data Technology, a Fremont, Calif.-based system builder, said the flaw in Cougar Point has brought all of Bold Data's Sandy Bridge shipments to a halt. Kretzer also questions whether Intel truly did find out about the error in the days before it quickly fixed and publicly acknowledged it.

"This has put a virtual halt to all of our Sandy Bridge shipments," Kretzer said. "If Intel just found out about this issue, then they definitely deserve credit for getting it out there. However, there were rumors going around CES that there was some sort of bug with Sandy Bridge, and if that’s true it would’ve been nice to warn their customers much sooner than February."

Next: The Implications Of The Cougar Point Error

An Intel spokesperson declined to comment as to whether Intel was aware of a problem with Sandy Bridge, citing Intel's policy not to respond to speculation and rumor.

The implications of the error, beyond potential financial setbacks to Intel, its partners, and its customers, could include growing discontent among system builders looking for more options.

"This just reinforces those of us who believe that we’d be far better off if there were more than just a single vendor making chipsets for Intel processors," Kretzer said. "Perhaps their rekindled relationship with Nvidia will bring some much needed change to this area."

Coffield said there were a number of issues related to the recall and subsequent delay of Sandy Bridge products affecting Intel's supply line. "The timing is horrible as we have quotes out for business desktops and workstations out that we cannot fulfill," Coffield said. "Budgets are re-opened for the New Year and we cannot take advantage of this. Tax returns are starting to come in so our consumer segment is also hit. It's very difficult to quantify numerically until we know exactly when replacement product will start flowing in."

More importantly, Coffield said, system builders are not able to meet customer demand once the product has been recalled, undercutting the momentum and enthusiasm surrounding the launch of Sandy Bridge. "The biggest issue right now is not having product to sell. We made a commitment to the new platform and we were actively phasing out all other sockets but 1155," Coffield said. "The other bad part is that for the first time in several years we were starting to witness a small uptick in sales primarily based on this new platform. This now put a knife in the heart of this uptick."

Nevertheless, some partners noted that Intel seemed to deal with the problem quickly and transparently. "Intel has been quite honest and open about the recall," said a system builder who requested anonymity. "They gave all of us some time to prepare for this."

Kent Tibbils, vice president of marketing at ASI, a Fremont, Calif.-based system builder, agreed that Intel should be commended for its response time and pointed out that the Cougar Point flaw is far from unique.

"This certainly isn’t the desired outcome of what you hope for when launching a product, so it does require realigning your strategy and product plans," Tibbils said. "Unfortunately this type of extended use failure isn’t unique in the channel as we’ve seen similar problems in the past from other manufactures who didn’t necessarily manage the issue correctly. So even though all the return details have not been finalized, Intel is doing the right thing by addressing the issue now rather than later."

Next: The Impact On Intel's Supply Line

Despite its quick response, Intel may not be able to avoid a lag in the supply line considering the sudden halt in the manufacturing process. "The bigger concern will be supply because even though the current Corei3, i5 and i7 processors are exceptional products and still make up the wide majority of shipments compared to Sandy Bridge, it’s difficult to see how the factories can recover to completely meet demand," Tibbils said.

Another system builder who requested anonymity said others in the supply line were more likely to incur losses from the recall than the reseller channel. "This may have more impact for Tier 1s than it does on the system builder channel," the system builder said. "Many members of the channel have launched products in conjunction with Sandy Bridge, but there may not be that many systems shipped due to product availability. Therefore the impact on the reseller channel may not be as severe as previously anticipated."

Asked if Intel has said it will reimburse its channel partners for the labor required in replacing the chipset on their customers' motherboards, Coffield said partners will have to go through distributors in order to be compensated.

"It is our understanding that all motherboards can be returned to distribution for full credit," Coffield said. "We are inspecting our inventory today and getting exact counts, it's our position that distribution will need to issue call tags for the product as we will not absorb any costs in returning defective and unsalable product. They in turn can seek compensation from Intel. At the end of the day we paid distribution for the products, not Intel."

However, Intel said it will contact the system builders and customers who purchased potentially flawed chipsets or systems in order to replace or modify them.

"I think they will reimburse their partners for the time spent trying to remedy their problem, and try to bring people back that may have walked away," Brown said. "They'll say 'Look, we don't make mistakes very often but when we do, we correct them.' They'll throw a bigger rebate back for higher volume to make up for it. I don't think it will trickle down to end customers. People aren't going to care, frankly."

Some of these problems are trickling down to end users as they deal with similar uncertainty and frustration as a result of the recall, especially those who were enthusiastic enough about Sandy Bridge to purchase it within the first month of the launch.

Next: Cause For A Class-Action Suit?

"For systems in the field we are expecting our clients to 'wait it out,'" Coffield said. "We will replace at no charge any motherboard affected by the ’recall.’ We have asked Intel for financial support in the costs of swapping out a motherboard for the client as there is significant labor involved in doing so. This has not been replied to."

Although Intel has said it will resolve the technical and financial issues resulting from its mistake, the question of whether or not to pay for the labor involved in solving may be contentious enough for court, according to Coffield.

"I explained to them that if Ford recalls a part -- the dealer gets paid for their efforts in replacing it," Coffield said. "If they refuse there will definitely be grounds for a class action lawsuit as there is certainly comparable precedence."

Intel said it expects to begin offering the fixed chipset to customers in late February and expects to recover the entire volume of sales from the chipset by April thus avoiding any year-end impact. One system builder flatly rejects that possibility.

"There obviously will be a revenue impact, and it's going to lead to end-of-year issues," Brown said. "I would absolutely disagree with Intel on that, unless the demand stays stronger and customers are patient enough. But they're going to lose first-time buyers, no doubt.

Despite disagreeing with Intel on the question of the time period over which the financial loss will be felt, his estimation of the total cost itself and the time it takes to resolve the issue is in line with Intel's.

"I expect it to cost them about a billion total for everything," Brown said. "I expect the product to be delayed about 60 or 90 days. I don't think system builders are going to be too greatly affected. I think it's hard to quantify it from the system builder perspective, because those are typically private companies.

Coffield identified another problem that stems from the possibility that the price of Sandy Bridge may change as a result of the error and system builders will have to absorb the loss instead of Intel. "We are also not offered any price protection," he said. "So what happens if there is a price move before we can even sell these items? We intend to return all products purchased to assemble Sandy Bridge based computers -- this may even include SATA III hard drives and other components purchased to be installed in Sandy Bridge systems."

Next: The Total Cost Of The Error For Intel

Although the motherboards will require replacements, the defective processors themselves cannot be sold either, leaving either Intel or Intel's partners to pay for them. "I have not seen any policy on processors yet, but they are basically worthless at this time and we intend to return them as well," Coffield said. "We cannot sit on processors that cannot be sold for months and be expected to pay for them."

Intel expects the recall to cause a shortfall of approximately $300 million in its first quarter, 2011 revenue as it brings production of the defective chipsets to an end and begins producing the newer version. In addition, the total cost to repair and replace the affected hardware is approximately $700 million, according to Intel, bringing the total cost of Intel's mistake to $1 billion.

"I don't know what kind of financial hit this will represent for Intel's partners," said a system builder who requested anonymity. "It depends on whether system builders are more into the desktop market or the server/workstation enterprise market. Desktop systems will be hit more severely than others."

In fact, system builders believe the percentage of the affected chipsets is relatively low, and many are passing on the message that most Sandy Bridge chips will not malfunction to customers who have purchased Sandy Bridge products. Intel said the number of Cougar Point chipsets affected is between 5 and 10 percent.

"I think Intel is well-run and they make good moves." Brown said. "They had a technical issue, they caught it, they're addressing it, and it’s all public knowledge -- I think that's important in and of itself. There's a five to ten percent failure rate for Sandy Bridge with this error. That is significant -- but it's also not significant from the standpoint of actually wanting to avoid having a problem, since 1 or 2 percent failure rate is usually the threshold for a recall and that isn't very much."

Coffield said Smart Guys Computers has told the same thing to customers about the impact of the error on their PCs, and will assure them of their support for those products as it waits for more details from Intel. "Customers who are inquiring about systems they have purchased are being advised that there is only a miniscule chance they will have any issues prior to the fixed boards becoming available," he said, "and that we as an Intel Premier Provider will stand behind the product and handle all warranty issues in a timely fashion."

Next: Will This Delay The Launch Of Core vPro

Finally, there's the question of how other Intel Sandy Bridge-based solutions will be affected. Intel partners say a family of Intel Core vPro processors based on Sandy Bridge's 32nm architecture was expected to launch soon and target enterprise systems. "Our understanding is that Intel is delaying a lot of product launches and the Core vPro may be one of them," said an Intel partner who requested anonymity.

Brown, meanwhile, said as a product designed for the enterprise space, the Core vPro fortunately will not have to deal with the same level of consumer demand and mounting expectations as Sandy Bridge, thus avoiding the same setback as Cougar Point.

"Core vPro is important for desktop virtualization, for getting everyone on the same platform, and being able to monitor them," Brown said." It's hard to tell in enterprise type integrated very slowly, so it may not impact them. If there is an impact it's going to be very minor."