Information Technology and the Emerging MegaConsumer:

The Case of the PentiumÔ Flaw

By

Mustafa V. Uzumeri

and

Charles A. Snyder

Department of Management

415 W. Magnolia St.

Auburn University, AL 36849

(205) 844-6531

Copyright: January 25, 1995

Working Paper - Please do not Quote or Cite

Information Technology and the Emerging MegaConsumer:

The Case of the PentiumÔ Flaw

Abstract

In June 1994, Intel Corporation discovered a flaw in its flagship Pentium processor. For divisions

involving a few isolated numbers, the floating point unit (FPU) gave the wrong answer. The case

illustrates a new factor that managers must take into account in planning their relationship with

customers. The Internet and similar electronic networking technologies provide increasingly wide

exposure for any issue that captures the interest of the electronic community. If the object of that interest

is a product flaw, customers’ subjective perception of risk and their ability to mobilize and assert that

perception present an entirely new dimension. Companies must understand the fundamental shifts that

can occur and factor those possibilities into their strategic and tactical planning.

2

BackgroundIn June 1994, Intel Corporation discovered a flaw in its flagship Pentium processor. For divisions

involving a few isolated numbers, the floating point unit (FPU) on the chip would give the wrong answer.

Intel discovered the flaw in the June, 1994. Intel’s tests showed that the error only appeared in the ninth

significant digit of the answer and affected only a minuscule percentage of the possible division

combinations. As a result, Intel concluded that the flaw was trivial. It corrected the error in subsequent

production, but did not list the flaw in its errata sheets to computer makers and it continued to sell

hundreds of thousands of flawed chips that had already been produced.

In early October, Dr. Thomas Nicely, a mathematician at Lynchburg College, found an anomaly

in his calculations. After eliminating other sources of error, Dr. Nicely concluded that the Pentium chip

itself was at fault. After contacting Intel’s technical support service to no effect, he posted an electronic

message to a Compuserve bulletin board asking other Pentium owners if they were aware of the problem.

The flurry of Internet electronic mail and bulletin board postings that followed confirmed the

error. Reporters from the print and electronic media picked up the story and informed the public at large.

This touched off a firestorm of concern. On November 27, 1994, Andrew Grove, CEO of Intel posted an

electronic message to the Internet community that acknowledged the problem, emphasized its minimal

significance and made a qualified offer to replace the Pentium chip for “users of the Pentium processor

who are engaged in work involving heavy duty scientific/floating point calculations.”1 Meanwhile, Intel

worked with Dr. Nicely and other scientists to develop a ‘workaround’ that software developers could

build into their programs to avoid the flawed calculations.

Rather than resolving the matter, Intel’s qualified offer and workaround accelerated the reaction

by Pentium customers. Throughout December, experts participating in Internet discussion groups

proposed a number of scenarios in which Intel’s ‘subtle’ flaw might cause serious computation errors.

Although the plausibility of the scenarios varied widely, their cumulative effect was to raise concern

among the general body of Pentium users. In the face of this debate and increasingly critical worldwide

print and electronic coverage, Intel decided on December 20, 1994 to offer a replacement chip to all of its

customers -- “no questions asked.” Finally, on January 17, 1994, Intel issued a press release stating that it

3

intended to take a one time charge of $475 million against its earnings for the fourth quarter of 1994 to

pay for the replacement program.2

The Unique Case of the Pentium FlawThe Pentium flaw offers a unique research opportunity for several reasons. First, the availability of

archived information on the Internet makes it possible to document the evolution of the analysis of the

problem and its subsequent debate. Second, many of the participants were computer or professionals who

were very precise in their use of language and in the structure of their arguments. They also tended to be

extraordinarily precise and explicit about their assumptions and perceptions.

Third, many of the participants proposed conceptual models to explain both customer reaction to

Intel’s actions and the structures of the risks that the Pentium flaw created. Indeed, many of the

participants described their reasoning in terms that are easily linked to a formal risk assessment model.

This specifically includes Intel, whose initial decision to tolerate the flaw was based on a quantitative

analysis of its customers’ risks. When Intel concluded that these risks were extremely low, it decided that

nothing needed to be done. When alternative analyses caused Intel’s customers to adopt more

conservative risk assessments, they ultimately concluded that something had to be done.

With most examples of large-scale public reaction, the emotional responses can make it difficult

to elicit the underlying decision constructs. In this case, we believe that the systematic

conceptualizations, coupled with the record of broader public reaction, provide a rare insight into those

thought processes. As such, we believe that this case, more than any in recent memory, justifies the

otherwise risky undertaking of proposing a new model based on one set of events.

Based on the events in the Pentium case, this paper proposes a model to explain the intensity of

the customer reactions that assaulted Intel. The proposed model is synthesized from three sources: 1) the

mathematical computation of expected customer loss from a product defect, 2) research on the perception

of technological and environmental risks, and 2) the insights offered by the participants in the Pentium

debate.

4

The Effect of Perceived Product RiskWhatever else they may have disagreed about, the participants in the Pentium debate agreed that

the heart of the issue concerned risk. In fact, the debate largely decomposed into two questions: did the

Pentium flaw expose Pentium owners to undue risks and were those risks large enough that Intel ought to

replace the flawed chips? To create a model of the issues in this debate, it is therefore necessary to define

a perspective on risk. As it turns out, previous studies of risk do not describe the Pentium events very

well.

Marketing scholars, for example, have studied how potential customers perceive risks before they

make a voluntary purchase.3 However, the at-risk Pentium owners had already bought their computers.

They were faced with an involuntary risk after the purchase was complete. Moreover, the Pentium

owners’ perceptions of risk are not as interesting as their reaction and their ability to pressure Intel.

While it was clear that their motivation to react was based on their assessments of risk, the development

of the reaction involved a number of other factors.

Fortunately, there is a well-studied phenomenon where public perceptions of hazards are known to

produce powerful and complex reactions. This is the public reaction to technological and environmental

hazards such as pollution, waste dumps, and nuclear power plants. From this research, policy-makers

have come to recognize that public perceptions play a role that is even more powerful that the imperative

of the “scientific” risk estimate:

Whereas technologically sophisticated analysts employ risk assessment to evaluate hazards, the majority of citizens rely on intuitive risk judgements, typically called “risk perceptions.” For these people, experience with hazards tends to come from the news media, which rather thoroughly documents mishaps and threats occurring throughout the world.4

We have drawn on this research by making an analogy between public reactions to environmental

threats and customer reactions to the Pentium flaw. In effect, we propose to view the Pentium flaw as a

stream of "pollution" that threatened to poison the computing environment of its owners. The following

comment by an active participant in the debate suggests that our perspective is neither original nor

unreasonable:

The industry has correctly intuited that there's a great deal of capacity out there to absorb a steady stream of numerical pollution, especially given how small that stream is, just like a 10% level of CO streaming out of a car exhaust. What the industry has

5

*not* done howver is to compare that capacity to the likely pollution rate and to establish with some reasonable certainty that the several million polluting Pentiums out there will not present a serious hazard over their expected lifetime.5

If one views product defects as "pollution", the reactions of Pentium customers can be studied in

terms of three interrelated factors: the objective calculation of the risks to individual customers, the

subjective perception of those risks, and the new information infrastructure that allowed customers to

forcefully discuss and develop their mutual concerns about those risks. Each of these issues is examined

in turn in the following sections.

Intel’s initial reaction to public reports of the Pentium flaw were predicated on a rational model of

product risk. Figure 1 characterizes this model as a chain of causation between the supplier and the

customer.6

Figure 1 - Risk Assessment for an Individual Customer

The first link in the chain involves the release characteristics of the defect. The second factor

measures how potential customers are exposed to the defects. The third link in the chain characterizes the

consequences that the defect is likely to create for customer activities. For a simple one-to-one sales

transaction, the customer can expect that each defective unit it receives will produce a loss that is the

product of its rate of loss (l) and the defect’s persistence (p). To determine the customer’s overall loss,

this product is multiplied by the number of defective units that the customer can expect to receive. This,

in turn, will depend on the severity (s) of the defects that the supplier produces and the frequency (f) with

which the defects enter the supplier's product stream.

For more complex transactions, where suppliers may sell to many customers, each customer can

expect to suffer a loss that is proportional to its share of the supplier’s defect production. In effect, each

customer may be exposed to a different concentration (c) of defective products. By multiplying these

terms together, each customer could calculate his or her expected loss:7

Loss severity frequency concentration loss rate persistence_

This estimation approach has a critical property that Intel tried to exploit. Since the relationship is

multiplicative, if any of the terms is zero, then the customer loss is zero. In the Pentium case, most terms

6

were soon known. Customers discovered that every Pentium chip was flawed, so the defect frequency

equaled Intel’s Pentium production. Customers learned about the severity first from Dr. Nicely on

October 30 8 and later from Tim Coe of Vitesse Semiconductor on November 28. Coe presented a model

that explained which specific calculations were in error.9 On November 30, Intel published a “white

paper” that confirmed Coe’s model and explained the flaw in detail.10 Since these values remained

constant throughout the debate, everyone ignored them in subsequent discussions. Finally, although the

assumption was later relaxed, participants initially believed that the concentration was the number of

Pentium computers that each customer owned. This left two values for debate: the persistence and the

rate of loss. Initially the discussion assumed that the flaw’s effects were limited to the calculation at hand

(i.e., the persistence p would be small), but this view changed as experts proposed ways that errors could

become embedded in compiled programs. However, the greatest discussion focused on the rate of loss

that the flaw was likely to generate. This was the variable that Intel focused on in its public relations

efforts. It was also the variable that generated the greatest controversy among the discussants.

When Intel’s internal testing found the flaw in June, the company conducted extensive studies to

determine what risk the flaw posed to end-users. Believing that the other risk factors were understood,

this analysis focused on estimating the rate of loss. Intel’s approach is documented in its November 30

“white paper”. Of particular interest is the chapter entitled: “Evaluation Framework to Gauge Impact on

User”, which begins:

The significance of the flaw to an end-user clearly depends on:1. The frequency of occurrence of the reduced precision divide within the application. If the flaw is unlikely to be seen during the practical lifetime of the computer it is of no significance to the user.

2. The (propagated) impact to the end-user when the problem manifests itself.11

From this, Intel concluded that the flaw was very minor. Unfortunately, Intel did not consider how

the rational fears of individual customers would be expressed in a more complex industry, such as

illustrated in Figure 2, where a supplier delivers its product to two different types of customer:

industrial customers and end-users.

Figure 2 - Structure of the Value Chain

7

The supplier is the last organization to add significant value to the product before it passes into

customer hands. Intel is the sole supplier for the Pentium chip. Once a Pentium chip leaves Intel’s

factory, its function and performance cannot be changed. Intel sold large numbers of chips to industrial

customers who assembled computers for end-users. The industrial customers added value in other areas

of the computer, but did not alter the Pentium chip itself. Intel’s industrial customers included both large

computer companies (see Table 1) and smaller assemblers and direct mail marketers. Finally, the

product may pass through various intermediaries such as distributors or retailers who may add value in

the form of services. The other intermediaries played a relatively minor role in the Pentium debate.

CompanyNumber of PCs

Shipped (millions)(a)

% of Sales that are Pentium

(b)

Approx. PentiumSales (millions)a

(a)(b)Compaq 4.46 8.8% 0.39Gateway 2000 1.12 19.0% 0.21Packard Bell 1.52 12.9% 0.20Dell 1.37 14.0% 0.19IBM 3.97 4.0% 0.16HP 1.17 9.6% 0.11AST Research 0.92 7.6% 0.07NEC 1.85 0.8% 0.01Apple 3.85 0.0% 0Toshiba 1.36 0% 0

TOTAL = 1.34 a calculated from entries in original table

Table 1 - Major Assemblers of Pentium Computers in 199412

Intel’s traditional approach to resolving product defects reflected an implicit assumption that the

assembler were responsible for dealing with end-users. It also assumed that detailed knowledge of the

flaw would be restricted to the industrial customers. When millions of computers with flawed Pentiums

passed into the hands of end-users, both of these assumptions were open to question.

Microprocessor defects are not rare in the microprocessor industry. Given the complexity of the

microprocessor, occasional flaws are inevitable and Intel had experienced problems with its two previous

microprocessor generations. In 1987, Intel’s 80386 chip exhibited problems in multiplication and Intel’s

8

80486 chip experienced compatibility problems in January 1990.13,14 When a flaw is discovered during

internal testing or referred by an assembler, it is industry practice for chip manufacturers to publish errata

sheets that warn assemblers of the problem. Normally, access to the errata sheets is subject to non-

disclosure agreements.15 Since the assemblers deal directly with end-users, chip makers assume that the

assemblers will resolve any problems with the public.

When an end-user’s computer has a defective processor, the customer is likely to assume that just

the one chip is bad. They will likely return the product to the assembler or retailer for a replacement. The

customer is unlikely to phone Intel and demand a product recall. As a result, it is only when an industrial

customer or intermediary experiences a pattern of product repairs or returns that the problem is likely to

be identified as a systemic defect.

Under this system, industrial customers and intermediaries aggregate the risk perceptions of end-

users and summarize them for the supplier. Thus, the most urgent demands on suppliers have traditionally

come from industrial customers that serve as a focal point for the aggregated risk perceptions of end-

users.16

When Dr. Nicely found the Pentium flaw, Intel had to abandon its customary responses and search

for an approach that dealt directly with large numbers of end-users. In its initial responses, Intel seems to

have operated on the assumption that it could deal with end-users in the same way that it had dealt with

its industrial customers. Intel published the results of its risk calculations, first informally and later in the

detailed white paper. The white paper concluded that:

The flaw is of no significance in the commercial PC market where the vast majority of Intel processors are installed. Failure rates introduced by this flaw are swamped by rates due to existing hard and soft failure mechanisms in the PC systems. The average PC user is likely to encounter a failure once in 27,000 years due to this flaw, indicating that it is practically impossible for such a user to encounter a problem in the useful lifetime of the product.17

At the same time, Intel acknowledged that “the flaw is of potential significance to a small

minority of users in the financial world” and “a small fraction of PCs are installed for use as

engineering/scientific workstations”, where the flaw could affect “highly numerical applications”. 18 The

white paper supported Andrew Grove’s November 27 announcement that Intel would replace chips for

users who needed high precision in their applications. Mathematicians, engineers, financial modelers and

other “high-risk” groups were targeted as deserving of the replacements. In effect, Intel chose to respond

9

only to those individual end-users who could prove high individual levels of risk. Intel offered to work

with customers individually to help them assess their risk and to replace the chips for those few whose

risks exceeded an unspecified threshold. 19

The Impact of the InternetUnfortunately, Intel’s assumption that customers could be dealt with on an individual basis was

wrong from the outset. Intel’s initial public response ignited a firestorm of protest. Intel had not

recognized that its implicit models of customer pressure did not apply in this situation. The global

electronic network called the Internet had fully revealed the flaw to end users. This destroyed Intel’s

assumption that it could resolve problems with end-users as though they were independent assemblers.

The Internet allowed individual end-users to coordinate a collective response that effectively destroyed

Intel’s ability to deal with them one-at-a-time.

More significantly, this response was amplified by the Internet. To understand this effect, it is

important to understand how quickly the world of electronic networking is growing. Table 2 lists several

indicators of activity on the Internet. The Internet is only one, albeit the largest, of the electronic

networking and electronic mail services that are available to businesses and the public. All of these

services have the capability to support the creation and coordination of extremely large groups that share

a common interest.

DateNumber of

Internet HostsaUsenet Message Traffic (MB/day)b

Usenet Posts(articles/day)

Usenet Groups

late 1988 56,000 4.4 1,933 381late 1993 2,056,000 50 19,362 NAfall 1994 3,500,000+ 190 72,755 >4,500a A host is an Internet address, analogous to a telephone number. Usually, each host is a separate computer, although large computers may support multiple hosts.b MB = megabyte or million bytes

Table 2 - Growth of Internet Activity20

In the case of the Pentium flaw, a particular Internet discussion group, comp.sys.intel, served as

the focal point for a heated and well-informed debate. Comp.sys.intel is one of a collection of discussion

groups collectively referred to as the Usenet. As shown in Table 2, these discussion groups are

10

proliferating extremely rapidly. As they spread, these groups are becoming more specialized and much

more active. In the case of the Pentium flaw, the discussions comp.sys.intel contributed to the furor in at

least four distinctly different ways.

Collective Knowledge

The Internet’s most obvious impact lay in its ability to connect knowledgeable end-users with one

another. Ultimately, this process produced widespread knowledge about the flaw. Otherwise isolated

1 Andrew Grove, in a statement relayed by Richard Wirt, Director Software Technology, Intel Corporation (rwirt@ix.netcom.com) and posted to Usenet newsgroup comp.sys.intel, November 27 1994 19:31:21 GMT.2 Intel Press Release, January 17, 1994, posted on Intel WWW home page at www.intel.com3 Henthorne, T.L., LaTour, M.S. and Williams, A.J., Risk Reduction and Informal Interpersonal Influence: Industrial marketing perspectives, Akron Business and Economic Review, 21(3) Fall 1990, 46-59.4 Slovic, P., Perception of Risk, Science, v236, April 17, 1987, pp280-285, p280.5 Vaugh Pratt, pratt@Sunburn.Stanford.edu, posted to Usenet newsgroup comp.sys.intel, December 26, 1994.6 Covello, V.T. and Merkhofer, M.W., Risk Assessment Methods: Approaches for assessing health and environmental risks, Plenum Press, New York, 1993, pp5-8.7 This can be stated more generally as:

Expected Loss to Customer i E s f E c E l pi i i ( ) ( ) ( ) (1)

where s=severity, f=frequency, ci =concentration at i, li = i’s loss_rate, and pi =persistence at i8 Original email from Thomas Nicely, nicely@acavax.lynchburg.edu, to Andrew Schulman, 76320.302@Compuserve.com, retrieved from Mathworks’WWW Server at www.mathworks.com.9 Tim Coe, coe@vitsemi.com, posted to Usenet newsgroup comp.sys.intel, November 28, 1994.10 Sharanpani, H.P. and Barton, M.L., Statistical Analysis of Floating Point Flaw in the Pentium Ô Processor (1994), Intel Corporation, posted on Intel’s WWW Home Page at www.intel.com., November 30, 1994.11 Sharanpani, H.P. and Barton, M.L., ibid. p1113 Computer Design, July 1987, pp22-3.14 IEEE Spectrum, April 1990, pp8+.15 Crothers, B., Intel changing its tune on revealing chip flaws, Infoworld, 17(2) January 9, 1995, p1.16 Conceptually, we would model this traditional intermediary pressure for remedies as a function similar to the following:

Pressure for Remedy = f MAX c E l pA i i i

i

N A

( )1

(2)

where A industrial customers, each sell to NA end-users.17 Sharanpani, H.P. and Barton, M.L., ibid. p2718 Sharanpani, H.P. and Barton, M.L., ibid. p2719 Conceptually, Intel’s assumption in its white paper can be characeterized by the following model:

11

individuals became collectively aware of the potential risks. They not only learned that their computer

had the flaw, they learned that everyone else’s Pentium computer had it as well. The impact of this

shared awareness was evident early on in messages posted on the Internet.

Weeks before the daily papers or Wall Street got wind of the calculation error in the Pentium chip, the flap over it was gaining momentum in the on-line community. Particularly damning were the jokes, replicated across thousands of electronic mail accounts, ridiculing the Pentium and its errors.

Equally important, the gist of the debate was picked up by mainstream print and electronic media.

A number of reporters at technical publications had developed the habit of monitoring the major bulletin

boards. Indeed, the recipient of Dr. Nicely’s original letter immediately forwarded it to Alex Wolfe of the

Electronic Engineering Times who picked up the story:

Executives at Compaq Computer Corp. and Dell Computer Corp., two large Pentium customers, said they had begun to receive calls from users who had found the error using a test recommended by Nicely.

A spokeswoman for Compaq said the company was referring the calls to Intel. A spokesman for Dell said the company had been contacted recently by Intel and was dealing directly with customers.21

The structure of the reaction is shown in Figure 3. Intel found its decisions were being driven not

by individual customer needs, nor even by its largest industrial customers. Instead, it was been pressured

by a large group of end-users who were collectively aware of the potential risks. The customers in this

group each understand their own risk, but more importantly, they were aware of other members'

experiences with the product. This shared knowledge allowed large numbers of unconnected individuals

to reward or penalize Intel in a concerted fashion.

Figure 3 - "Collective Risk"

Instead of dealing individual end-users, or even assemblers, Intel found itself facing a large group

of collectively well-informed end-users and the assemblers who were fielding their complaints. Worse,

many of these end-users were influential in computer purchase decisions within their organizations.

Pressure for Remedy f MAX c E l pi i i i( ) (3)

21 John Markoff, New York Times, November 24, 1994.

12

Individuals who owned Pentiums and tracked the debate were likely to be “power users” and information

systems decision-makers. As a result, Intel found that it had to deal with a completely different model of

customer pressure, in effect a . It effectively faced a collective response .22

The challenge by the collective response depends on the size of n. In the past, aggregation

mechanisms have been limited and slow, unless the mass media becomes involved. That usually only

happens if a defect poses a threat to public health or safety. The prospect of cyanide-laced Tylenol, or the

potential fire hazard associated with the Ford Pinto’s gas tank placement are examples of the traditional

media-driven collective response. For less threatening defects, the mechanisms have been typically been

product reviews such as the J.D. Power Customer Satisfaction Survey for automobiles and the various

Consumers’ Reports publications. These tend to be slower and have a narrower reach. With the Internet,

however, the value of n became very large, very fast. By late December, a Time magazine article

reported the following:

... customers who had bought - or planned to buy - Pentium-based computers were confused and often angry. Intel admitted last week that tens of thousands of customers have called about the problem.23

Subjective Risk Inflation

As participants got together to discuss the flaw, Intel encountered a second new phenomenon.

Scholars have long recognized that human perceptions of risks are strongly influenced by subjective

factors in their environment. The rational risks associated with product failure have been discussed at

length. However, marketing scholars have noted that product failures can entail a social risk for the

products’ owners. If the purchased product does not meet with peer approval, there is an additional

perceived loss.24 While the degree of this effect is probably impossible to measure, the inter-peer

discussions on the Internet seem to have fostered some of this feeling. One indication may be found in

the statements of individuals who felt compelled to justify their decision not to press for an immediate

replacement:

Please note, though, that I did not send my chip in for a replacement. Why? I really do not need it. I do not use my computer for anything that will be affected in the least.

23 Jackson, D. and Van Tassel, J., When the Chips are Down, Time, December 26, 1994, 144(26) p26.24 Henthorne, T.L., LaTour, M.S. and Williams, A.J., ibid.

13

Therefore I am not worried and don't care. And, as you say, why do it if you don't need it? But if I had any doubts that anything I was doing would be affected, it would make me a lot happier customer knowing that it could be replaced with a non-faulty version.25

Beyond the social concerns, however, there is an extensive psychometric literature suggesting that

individuals tend to inflate the probability and consequences of a hazard if they: a) dread the consequence

of the risk, or b) do not understand the risk. Table 2 lists eighteen factors that Slovic, Fischoff and

Lichtenstein identified as likely to increase public perceptions of the risks associated with environmental

hazards.26

Factors that Increase the Subjective Perception of Environmental Risk

Quotes Illustrating Subjective Considerations in Public Reactions to the Pentium Flaw

Things that caused fear of the consequences:

· The risk could lead to a global catastrophe

· The consequence will occur suddenly

· Many people will be exposed to the risk

· There is little that the individual can do to reduce the threat

· The threat is increasing· The customer did not accept the risk

voluntarily· The customer feels personally

threatened

12/26/94 - A LOT of work will have to be recalculated. Safety, professional integrity and liability are some of the primary reasons. No one whose work or reputation is at stake is pleased at all.27

12/26/94 - The flaw, some experts contend, might affect the accuracy of corporate balance sheets or the calculations that banks make to pay interest to depositors.28

12/28/94 - If an "at risk" expression is compiled, the resulting object programme will produce Pentium errors even when run on a 486 - and until the code is recompiled on a "good" Pentium.29

12/30/94 - When the world's Pentiums ship each other flawed data, a natural question to ask is whether the data processing equivalent of a sustainable and uncontrolled chain reaction is possible.30

Things that make the threat uncertain:

· The threat can’t be seen· People might not know they are

exposed· The consequences can occur long

after the first exposure· It is a risk that people haven’t seen

before· Even the scientists don’t fully

understand it

12/01/94 - To put it simply, if your data happens to cluster in the ranges of the "magic numbers" in the buggy CPU, you will get incorrect results 100% of the time; if your data is never in these regions, you will never have to worry. Now who has time to do a thorough, detailed numerical analysis like this on the input data? Nobody.31

12/14/94 - Ok, so since no application operates at the extreme low-rate end of the range, where Intel seems to think almost everyone lives, and since no application operates at the worst-case high-rate end either, where the doomsayers like to congregate, where *does* the typical application work and

22 One way to model the situation facing Intel would be to consider the pressure to be a function of the size of the collectively aware group:

Pressure for Remedy

f E c l pi i in

( ) (4)

where n is the number of end-users in the largest group that is collectively aware of its own existence.25 Scott Willsey, scottee@ix.netcom.com, posted to Usenet newsgroup comp.sys.intel, January 18, 1994.26 Slovic, P., Fischhoff, B. And Lichtenstein, S., The psychometric study of risk perception, in Risk Evaluation and Management, edited by V.T. Covello and J. Mumpower, Plenum Press, New York, 1986, p536.

14

play? No one knows. Not me, not you, not Intel.32

12/28/94 - This Pentium problem, on the other hand, is insidious because there *isn't* an obvious problem to the user. How many users do you know of who perform all of a complex spreadsheet's calculations on a different system, or on a pocket calculator, to confirm that the system performed them correctly.33

Table 3 - Examples of Subjective Risk Inflation

The considerations shown on the left side of Table 3 while not central to the Internet discussions,

were clearly in evidence in the discussion.34 By raising these concerns, the participants on the Internet

changed the discussion from Intel’s rational, one-on-one negotiation to a conflict that centered on

subjectively perceived risks.

Intellectual Competition

As the debate evolved, Internet participants began to contribute scenarios by which the flaw could

cause more tangible damage. As each scenario was introduced, the expert participants in the Internet

discussion reviewed it and collectively passed judgment on its inherent plausibility. Once a scenario was

deemed plausible, it rapidly became the baseline against which all subsequent scenarios were evaluated.

The result was a form of game:

Most of the noise has all revolved around "what if" scenarios, the frequency of encountering the error and who can come up with the MSB (Most Significant BUG). Anyone not making similar tribal noises gets flamed. It's like a guppy feeding frenzy.35

This game produced a steady stream of findings, some of which are listed in Table 4. As it

continued, the criticism of Intel by net participants was increasingly founded on the latest and worst

news. To make matters worse, non-experts quickly took ownership of the worst-case scenarios as if their

own risks met the stated criteria. Intel ultimately found itself facing tens of thousands of customers, each

of whom assumed that the worst case scenario could apply to them.36

35 Scott Compton, posted to Usenet newsgroup comp.sys.intel, December 26, 1994.

15

Date Technical FindingEffect on Risk Calculations

Oct 30 Dr. Thomas Nicely finds error in eighth significant digit.37 severity > 0frequency > 0loss_rate > 0

Nov 14 Tim Coe lists an example with an error rate of about 60 parts per million.38

loss_rate é

Nov 30 Intel issues its “White Paper”39 loss_rate êDec 3 Dr. Vaughn Pratt reports numerous examples with errors about 10 parts

per million, but gives a scenario by which these particular divisions occur much more frequently than random in typical computer calculations.40

loss_rate é

Dec 12 IBM halts shipment of computers with the Pentium and issues its own study. They effectively increased the communal estimate of the frequency aspect of the loss rate from one in 27,000 years to one in 24 days, a six orders of magnitude increase!

Intel has said that in purely random situations the likelihood of a customer encountering an error is only once in 27,000 years and that off-the-shelf software is not affected. However, IBM tests indicate that common spreadsheet programs, recalculating for 15 minutes a day, could produce Pentium-related errors as often as once every 24 days. For a customer with 500 Pentium-based PCs, this could result in as many as 20 mistakes a day. 41

loss_rate é

Dec 20 Dr. Pratt reports a conversation with Fred Gustavson of IBM that summarizes a plausible scenario for incorrectly calculated numbers to become permanently embedded in financial programs and databases. This meant that the error was contagious and could occur even on non-Pentium processors!42

loss_rate é persistence éconcentration é

Table 4 - Reports of Significant Technical Findings

27 Scott Compton, posted to Usenet newsgroup comp.sys.intel, December 26, 1994.28 Jackson, D. and Van Tassel, J., When the Chips are Down, Time, December 26, 1994, 144(26) p26.29 Phil Payne, Vice Chair, UK Computer Measurement Group, Phil@sievers.demon.co.uk, posted to Usenet newsgroup comp.sys.intel, December 28, 1994.30 Vaughn Pratt, pratt@cs.stanford.edu, posted to posted to Usenet newsgroup comp.sys.intel, December 30, 1994.34 These concerns can be represented in a model of customer pressure that replaces objectively determined risk factors ( c, l, and p) with subjective, inflated equivalents (C, L and P):

Pressure for Remedy

f E C L Pi i ii

n

1 (5)

37 Original email from Thomas Nicely, nicely@acavax.lynchburg.edu, to Andrew Schulman, 76320.302@Compuserve.com, retrieved from Mathworks Inc. WWW Server at www.mathworks.com.38 Tim Coe, coe@vitsemi.com, posted to Usenet newsgroup comp.sys.intel, November 28, 1994.39 Sharanpani, H.P. and Barton, M.L., ibid.40 Vaughn Pratt, pratt@cs.stanford.edu, posted to Usenet newsgroup comp.sys.intel, December 3, 1994.

16

Moreover, as the game continued, Intel’s “white paper” began to cause more harm than good. In

hindsight, it was probably unreasonable to expect that Intel’s analysis would be able to anticipate the

flood of scenarios that experts on the Internet subsequently proposed. However, as each new scenario

appeared, Intel’s analysis looked less accurate and more self-serving. It was especially badly hurt when

IBM’s analysis staked out a position that was almost at the other end of the risk spectrum. Even though

IBM was the manufacturer of the PowerPC, a competing chip, and was thought to have a conflict of

interest by many industry participants, its analyses were judged on their merits.

Accelerated Science

The final and most significant factor that intensified the Pentium debate was the fact that the

Internet integrated the popular and the scientific discourse on the Pentium flaw. The Internet made it

possible for the scientific and the lay community to interact while a major technical mystery was being

investigated. When this interaction was combined with the Internet’s ability to bring together a

worldwide collection of experts, a profound synergy was created.

Figure 4 illustrates the unusual relationship that drove public response to the Pentium flaw. As the

examples in Table 4 illustrated, the scientists on the net were able to generate a steady stream of analyses

and experiments that fed the growing public reaction. In a series of more than 60 separate messages,

Stanford’s Vaughn Pratt reported on at least 8 different tests or experiments that he had conducted. 43

Several of these were sufficiently detailed that he might well have been able to publish them under

different circumstances. When combined with the output of other researchers, including those at Intel,

Mathworks, IBM, and SAS Institute, the stream of new findings fueled the growing concern among non-

experts.

Figure 4 - The Synergy of Accelerated Science and Subjective Perceptions

41 IBM Halts Shipments of Pentium-Based Personal Computers Based on Company Research, IBM Press Release, IBM Corporation, Somers, N.Y., Dec. 12, 1994

17

The accelerated science represents an entirely new force in shaping customer reactions to product

defects. Companies have faced public hysteria in the past. Justified or not, traditional electronic and print

media have long been capable of whipping up storms of consumer anxiety. The media has fostered public

concern about cellular telephones that could cause cancer, and pickup trucks with exploding gas tanks.

Generally, however, these storms pass quickly unless credible revelations appear periodically to maintain

public interest. In the case of the Pentium flaw, it was the steady stream of credible new scientific

findings from respected technical sources that not only kept the issue alive, but fanned it to a fever pitch.

Planning for Electronically-Aided Customer ReactionIn many ways, Intel’s experience with the Pentium flaw represents a unique set of circumstances.

Intel’s experience was greatly intensified by factors that won’t be present for most other products. First,

the Pentium chip flaw was present in every unit, but was too subtle for most end-users to find. However,

once the flaw was publicized, an end-user could find it in a few minutes without special equipment.

Second, Intel’s customer base was extremely knowledgeable and was accustomed to participating in

electronic networking well before this issue arose.

It would be unwise, therefore, to suggest that Intel’s experience is likely to be soon repeated for

large numbers of firms. Nonetheless, the infrastructure that supported this customer reaction is becoming

more extensive every day. Sooner or later, conditions will again be right for a similar event to occur. As

one participant put it:

It [the Internet] is diverse, distributed, and lacks focus -- until some event grabs its attention. Then experts in the relevant area seem to flock together and attack the problem with a vengeance!44

In a period of less than six weeks, Intel saw its flagship product fall from a position of total market

dominance to become the butt of jokes. Even more damaged was Intel’s reputation for integrity in

dealing with customers. Given the new factors described in the previous section, it is easy to see why Dr.

Grove made the following statement:

"The past few weeks have been deeply troubling. What we view as an extremely minor technical problem has taken on a life of its own," said Dr. Andrew S. Grove, president and chief executive officer. "Our OEM customers and the retail channel have been

44 Bob Morris, Carleton University, morris.788482860@altair.sce.carleton.ca, posted to Usenet newsgroup comp.sys.intel, December 29, 1994.

18

very supportive during this difficult period, and we are very grateful," Dr. Grove said. "To support them and their customers, we are today announcing a no-questions-asked return policy on the current version of the Pentium processor.” 45

Yet, in hindsight, could any reasonable person have expected that Intel would be able to react

differently? Intel applied response mechanisms that had worked well for it in the past. With no precedent

to guide it, Intel could hardly have anticipated such turbulent market dynamics. To put the challenge in

perspective, Figure 5 illustrates the transition that this acceleration produced and which Intel had to

identify, comprehend and implement in less than a month.

Figure 5 - Shifting Models of Perceived Risk

Intel’s supplier-customer relationship changed from a quiet, one-on-one dialog to a raucous group

meeting, reminiscent of a public hearing to discuss a proposed toxic waste dump. As emerging

information technologies such as the Internet bring groups of experts and lay people together to consider

issues such as this, other firms may find that their assumptions about customer relations and support can

be changed overnight. For companies that view customers in terms of the traditional, rational negotiation

model, the result is likely to be just as unpleasant as it was for Intel. The following statement may be

hyperbole now, but the events associated with the Pentium flaw leave the impression that there may come

a day when it is taken for granted:

The not-so-savvy corporate management who still believe in dictating what should be done are probably horrified at the thought of wronged customers being in instant contact with each other, Intel system vendors, and state & federal agencies, which in the Pentium case, were also impacted. These corporate managers are probably terrified by instant communications between Intel customers, journalists, state & federal government agencies.46

Lessons for the FutureIf Intel’s experience is destined to be repeated, the Pentium case may offer a number of important

information for other firms. In particular, other firms might want to consider some of the following

lessons.

19

Don’t Make Defective Products

The events of associated with the Pentium flaw controversy provide the strongest possible

argument why companies should institute aggressive total quality management approaches. Intel’s $475

million charge against earnings represents a significant “cost of quality!” Once a company finds itself in

the middle of a ‘guppy feeding frenzy’, it is too late. The problem with this approach is that even the best

quality system will fail occasionally. Relying only on prevention would leave a company vulnerable if,

despite its best efforts, a serious defect were to sneak through.

Don’t Expect to Keep Secrets

A common approach is to try to prevent news of the product defect from reaching the public. In

effect, this strategy is designed to ensure that the situation follows the traditional model and does not

become an ‘environmental hazard’ situation. The prevalence of this strategy is evident in the frequent use

of out-of-court settlements and confidentiality agreements in product liability cases.

As the information technology becomes more widespread, this strategy will carry much higher

risks. The technologies that make the environmental hazard model more appropriate also tend to make

secrecy less promising. As expertise assembles in electronic interest groups, it is increasingly likely that

various individuals with partial knowledge of a given problem will interact with one another. A customer

who knows a critical fact may encounter a supplier who knows another. By putting their facts together,

they may deduce enough of the problem to present the issue to the electronic community at large.

Finally, the Internet technology is expanding into the home and there are services on the Internet

that allow individuals to participate anonymously in discussion groups. This offers an ideal forum for

potential ‘whistle-blowers’. They can disclose critical facts to interested parties, yet avoid most of the

risk associated with a public disclosure.

Try to Pre-empt Subjective Risks

A third strategy is to try to prevent customers’ subjective risk perceptions from becoming inflated.

To do this, companies must develop strategies and tactics to attack the two main dimensions of inflated

risk perceptions -- the fear of dreaded consequences and the fear of unknown risks. McNeil Laboratories’

20

response to the Tylenol cyanide poisoning crimes provides a model for reducing subjective risk

perception. When McNeil Laboratories announced the recall of all Tylenol packages, it effectively

eliminated the public’s subjective fears. In the process, it removed the dreaded consequences and

associated uncertainty from the public’s radar screen. When it eventually reintroduced Tylenol in safer

packaging, there was little subjective fear to overcome.

Don’t Second Guess Customers about their Perception of Risk

One of Intel’s worst mistakes was its decision to analyze the defect’s impact on behalf of its

customers. By basing its nondisclosure decision on this analysis, Intel was vulnerable when the Internet

community began hunting for the ‘most significant bug’. Intel’s white paper tried to tell customers what

their risks would be. Once the Internet community began to calculate their own risks and arrived at a

different answer, Intel’s response appeared both arrogant and self-serving. No company, however

resourceful, is likely to match the output that is produced by the Internet’s “accelerated science.” The

electronic community can assemble too many skilled people with different perspectives and expertise. If

there is anything that the company’s analyses have overlooked, a mobilized electronic community is

likely to find it. Then, even small discrepancies will undermine the company’s credibility.

Prepare for the Event

The Intel experience shows that, under the right circumstances, the electronic community can

respond with dramatic speed. When this happens, the affected company will have little or no time to craft

a response. To cope with the situation, the company will have to have a ready strategy that has been

worked out in advance. At the very least, companies will have to be brutally honest with themselves

about the possible consequences of any mistake or defect that might attract the interest of the electronic

community. This will include finding answers to the following questions:

· Are there interest groups in the electronic community that might serve as the nucleus for an intense

public reaction?

· Do these groups attract experts who could conduct independent investigations of the product?

· Is the product susceptible to the subjective fears and perceptions in Table 3? What are the

consequences of possible defects? How quickly will experts understand them?

21

· Has the company considered what effects the potential defect might have on customer activities? Has

the supplier asked its customers what the risks might be?

Future events will undoubtedly recommend additional questions to this list. However, as the Intel

experience shows, there are already good reasons for providers of products and services to pay attention

to the demands that this new environment creates.

ConclusionThis case illustrates a new factor that must be taken into account by managers in planning their

relationships with their customers. The Internet and similar electronic networking technologies provide

vast and rapidly growing exposure for any issue that captures the electronic community’s interest. If the

object of that interest is a product flaw, customers’ subjective perception of risk and their ability to

mobilize and assert that perception take on extraordinary importance. Companies must understand the

new and fundamental shifts that can occur and factor those possibilities into their strategic and tactical

planning.

References

12 Fortune, January 16, 1995, p15.20 Robert Zakon, hobbes@mitre.org, Hobbes Internet Timeline v1.4, last modified September 5, 1994, retrieved from the Internic ftp server at ftp.internic.net.31 Jim Pangburn, pangburn@fnalv.fnal.gov, Fermi National Accelerator Lab, posted to Usenet newsgroup comp.sys.intel, December 1, 1994.32 Vaughn Pratt, pratt@cs.stanford.edu, posted to posted to Usenet newsgroup comp.sys.intel, December 14, 1994.33 Terry Kennedy, Operations Manager, St. Peter’s College, NJ, terry@spcvxa.spc.edu, posted to Usenet newsgroup comp.sys.intel, December 28, 1994.36 This pressure on Intel began to resemble the following:

Pressure for Remedy f n MAX E C L Pi i i i[ ( )] (6)

42 Vaughn Pratt, pratt@cs.stanford.edu, posted to Usenet newsgroup comp.sys.intel, December 20, 1994.43 From Vaughn Pratt’s archive of postings to comp.sys.intel, retrieved from the WWW server at boole.stanford.edu, January 8, 1995.45 Intel Press Release, December 20, 1994, posted on Intel WWW home page at www.intel.com. 46 Jerry Leslie, jleslie@dmccorp.com, posted to Usenet newsgroup comp.sys.intel, December 30, 1994.

22