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Thursday, 06 February 2014 08:55

Intel defends selling tablet parts below cost

Written by Peter Scott

All is fair in love and war

Earlier this week an analyst crunched a few numbers and concluded that Intel’s financial forecast implies it will sell tablet chips without cost – and that without subsidies. If subsidies are introduced into the equation, Intel will sell the chips at cost.

Bernstein Research analyst Stacy Rasgon concluded that after end rebates, Intel’s tablet revenues are likely to be “close to zero,” while profits will be negative. Rasgon estimates the average subsidy will be $51 per tablet, which is much higher than Intel’s stated $20. He added that on the surface it seems absurd, but that’s the cost of being late to market.

However, Intel is having none of it. Intel Chief Financial Officer Stacy Smith told Barron’s that Rasgon's numbers are wrong. Smith pointed out that the “special costs” Intel is incurring are not pushing down gross margin and they are the cost of the chip itself. He adds that they are “rebates” in the form of “contra revenue” and one-time engineering fees. The goal of Intel’s rebates or whatever you choose to call them is to cut the bill of materials.

Smith pointed out that Intel was originally targeting the $500 tablet market with it chips, because it has high-performance parts.

“But the bill of materials for Atom chips at this point has very little to do with the SOC [system-on-a-chip] itself. The memory that works with our SOC is high-end, more like what you'd find in a PC. And so we are doing the value engineering to bring down the cost of that to our partners,” Smith said.

Regardless of what Intel chooses to call them, the rebates will nonetheless cost a pretty penny. Intel is now forced to compete in a different market than the one it had in mind – instead of selling Bay Trail parts for $500 tablets, it must find a way of getting them into $199-$299 devices and it appears that the total cost of the platform has to be offset to some degree.

This makes us wonder what Intel plans to do with next generation parts. If the approach works in the tablet space, there’s nothing stopping Intel from applying it to other product categories, namely smartphones. In other words it could choose to offer similar rebates to anyone who chooses to use Intel 14nm SoCs in smartphones, but of course this is just speculation at this point.

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