Intel has an ambitious goal for 2014: get its Atom chips into 40 million tablets, or four times the number of tablets that had Intel inside in 2013. But rather than do it by tailoring its products to what tablets now demand, the cash-rich company has another plan: pay tablet makers to use its chips.
That's essentially what Intel is doing through a program first disclosed at its financial analyst meeting in November. Intel will pay tablet makers to cover the additional component costs of using its Bay Trail chips instead of ARM-based processors, and it will also help cover the engineering costs of designing an Intel tablet.
The Intel division that makes Bay Trail will incur a "significant increase" in its operating loss to pay for the plan, CFO Stacy Smith said at the November meeting, but the upshot is likely to be a lot more tablets based on Intel chips, potentially even from big players like Samsung.
"Basically, they're making an investment to make up for them being slow to get into the market," said Dean McCarron, principal analyst at Mercury Research.
CEO Brian Krzanich shed a bit more light on the plan during Intel's quarterly earnings call Thursday when he was asked what proportion of Intel-based tablets will be supported by its so-called "contra revenue" subsidies.
After a bit of hesitation, Krzanich said that "the majority of projects we have in 2014 use some level of contra revenue." That confirmed what many analysts suspected: If you pick up a Bay Trail tablet this year, chances are Intel will have paid the manufacturer to cover the cost of using its chips.
It's not hard to see why Intel is being aggressive: PC sales are in the toilet and the chip maker has been left behind in the hottest market in personal computing. The vast majority of tablets today use ARM chip designs manufactured by the likes of Samsung, Apple, Nvidia, Qualcomm and China's Rockchip.
One cause of Intel's problems is that Bay Trail was designed for the high end of the tablet market, where Windows 8 has performed poorly. Intel now sees its biggest opportunity in lower-priced Android devices, but it's stuck with Bay Trail until new Atom chips code-named Broxton and SoFIA come out in 2015.
Analysts say Bay Trail is a good performer but doesn't have as much functionality integrated onto the chip as other tablet SOCs, so it creates a higher "bill of materials" for tablet makers. That means they need to buy additional components for functions like communications, or print additional layers onto Bay Trail circuit boards, Krzanich said Thursday.
With contra revenue, Intel is paying tablet makers to cover the additional bill of materials (BOM) costs. "This is not a price reduction; it's truly a BOM cost equalizer," Krzanich said. It will also pay for "non-recurring engineering" costs, which means it will cover the cost of taking an ARM tablet design and porting it to an Intel chip.
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