Stung by bad publicity about its top product and worried by signs of slumping sales, Intel Corp. reversed itself yesterday and agreed to replace defective Pentium computer chips for anyone who asks.
The decision probably will cost Intel tens of millions of dollars. But the price of continuing Intel's previous policy of erecting roadblocks for customers seeking free Pentium exchanges would have been higher, financial analysts said.
Intel in recent weeks has found itself in a public relations quagmire that experts said will go down in marketing textbooks next to the Exxon Valdez oil spill and the Food Lion tainted-meat case.
"To a large extent this was a problem that Intel created for itself," said Philip Bagnoli, an economist and technology expert at the Brookings Institution, a Washington think tank.
"But it does have repercussions for Intel. They're going to take a bath on the cost of replacing their chips."
Even so, no one is predicting that Intel's steel-and-silicon grip on the personal computer market will come undone. It may lose market share to rivals Motorola, Cyrix and Advanced Micro Devices, analysts said, but it will remain dominant.
"Over the course of 1995, I don't think sales will be affected that much," said Drew Peck, who follows Intel for Cowen & Co., a Boston investment house. "Even though it's very belated, this reaction has stemmed what otherwise has turned into an obvious public relations disaster."
Intel's stock rose by $3.44 per share on yesterday's news, to $61.25. Mr. Peck expects the company to earn $6.27 per share next year -- a level unchanged from his previous estimates. Intel will book the cost of replacing Pentiums this year.
The Pentium is a microprocessor -- the silicon-based "brain" of personal computers.
Introduced last year, it is the latest in a series of technological leaps that have put increasingly powerful computers on desks and in notebooks and have made Intel an $8 billion company.
Like other chips, initial Pentium versions were flawed. Intel discovered last summer that an error in Pentium's math function would cause wrong answers in some complex division problems.
But the Santa Clara, Calif.-based company didn't acknowledge the error until a university professor posted notice of it on the Internet, a worldwide computer network. Even then, Intel said it would replace Pentiums only for sophisticated customers likely to encounter problems.
Experts agree that the flaw will affect only a small minority of users, although some researchers said errors would be more frequent than Intel's calculation of once each 27,000 years for the average user.
"Most people that buy a computer aren't actually doing quadratic equations," said Jerry Greenberg, general manager of the CompUSA Inc. store in Towson.
Even so, Intel's policy prompted outraged protest from retailers, analysts and customers. Intel's image was further tarnished last week after International Business Machines Corp. said it would stop shipping Pentium PCs.
But for Intel, the deciding factor may have been signals of slowing in Pentium sales. Company officials told analysts yesterday that sales to businesses and other commercial users -- 40 percent of Pentium's revenue -- were starting to soften.
One local dealer of rival products reported increased interest from business customers who have been concerned about Pentium's reliability with financial spreadsheets and other applications.
"We didn't see a surge of sales, but the ones we were working on got easier," said Pat Nealy, general manager of Towson Computer, which sells Apple Computer Inc. products.
Intel said it will now replace Pentiums, "no questions asked." It will send chips directly to customers and also is setting up a dealer network to perform free replacements.
Intel has established a toll-free line -- 1-800-628-8686 -- to provide details about replacements and for technical assistance for those who want to replace the chip themselves.