What Is Intel Subsidizing In 2014?

At Intel's (INTC) investor meeting, the company announced that it is aiming to ship at least 40 million tablet units next year, with its Bay Trail system-on-chip leading the charge. The bomb that was dropped during the CFO's keynote was that the company would be providing significant contra-revenues (rebates, not "bribes") in order to offset the increased platform bill-of-materials cost associated with the Bay Trail platform, particularly in lower end devices.

Let's Get One Thing Clear

You're going to get a lot of Intel haters/bashers screaming that Intel is undergoing some structural gross margin compression as a result of its move into the tablet space. This is patently ludicrous; the GM hit that the company is taking is temporary as it attempts to sell a tablet platform designed for high end into the mainstream/low end of the market. In 2015, when Broxton is fighting at the high end (with a $20 cheaper platform BoM) and SoFIA/Merrifield/Moorefield at the low end, this BoM deficiency goes away and the company ends up turning a nice profit on these tablet/phone platforms.

What Is Intel Subsidizing?

Take a look at this slide depicting Intel's "Bay Trail" platform,

(click to enlarge)

Notice that the following IP blocks are not integrated onto the SoC but are part of the platform:

• WiFi


• Bluetooth


• GPS


• NFC


• Sensor Hub

Now look at what, say, a Qualcomm (QCOM) Snapdragon 600 includes on-chip:

(click to enlarge)

See how Qualcomm has all of those things listed above integrated onto the SoC while anybody using an Intel platform needs to buy separate chip(s)? This is part of the "bill of materials" problem that Intel's management referred to at its recent analyst day. Now, there's probably also some other stuff in the platform that's more expensive than it ought to be such as the power management IC and other little things here and there, but this lack of integration of key IP blocks definitely is the biggest pain point for Baytrail in the low end of the market.

Conclusion

Intel's problem at this point is at the SoC level, not the CPU or even GPU level, so anybody who tells you that Intel "licensing ARM" would solve the company's "problems" is just plain ignorant. Intel still has a lot of work to do on the platform side of things and on having all of the right IP built into the SoC, but Intel's management has been pretty clear that once we get through 2014, the 2015 lineup should solve these problems.

While Intel has come a long way and has addressed the really big issues (i.e. "can X86 be performance/watt competitive in mobile?"), investors have to realize that there are still other pieces to the mobile puzzle that have nothing to do with the CPU (i.e. ARM) and everything to do with SoC design methodology. This is something that Intel is still learning but it is something that it seems to be learning pretty quickly. Until then, Intel will be leveraging its full financial and technical might to make up for any deficiencies along the way in order to win major designs so that when its future, better suited parts hit the market, they really hit the ground running.

Source: What Is Intel Subsidizing In 2014?

Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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