After losing Apple's iPad business, Intel has bled $7 billion while heavily subsidizing cheap x86 At

Posted:
in iPad edited January 2015
Over the last two years, Intel's mobile chip division has lost $7 billion while heavily subsidizing the manufacturing costs of Android Atom tablet makers. It now plans to phase out those generous incentives, which will make it more expensive for iPad competitors to dump cheap tablets into the market.

Asus Memo with Intel Atom


Apple has been selling tens of millions of iPads in competition with a series of loss leader giveaways from Samsung and regular fire sales of flop tablets, including the HP TouchPad, BlackBerry PlayBook, Motorola Xoom, Dell Streak, Microsoft Surface, Cisco Cius, HTC Flyer, Google Nexus and Amazon Kindle Fire.

At the same time, Intel has been spending billions to flood the market with cheap Android tablets using its Atom processor. All of this subsidized, clearance sale product dumping makes it quite incredible that Apple can sell any iPads at all, let alone remain the world's leading tablet vendor.This subsidized, clearance sale product dumping makes it quite incredible that Apple can sell any iPads at all, let alone remain the world's leading tablet vendor

ARM and a lag

Over the past four years, Intel has been paying netbook and tablet manufacturers to switch from ARM Application Processors to its own chipsets centered around its x86 mobile Atom processor.

These payments include co-marketing, extreme discounts on Atom chips, and payments to cover the costs of redesigning logic boards to accommodate Intel's Atom rather than ARM chips from companies including Nvidia and Qualcomm.

In February, Bernstein Research analyst Stacy Rasgon noted that Intel's subsidies, which the company refers to as "contra-revenues," amounted to about $51 per tablet, "which on the surface seems absurd," particularly because those Android "tablets are increasingly cheap models, mostly sub-$199," according to a report on Rasgon's note by Barrons.

Rasgon wrote, "Our analysis suggests that Intel will likely not be selling tablet chips in 2014 for much above costs, with gross margins approaching zero, even before adding rebates into the mix." She calculated that Intel's rebates to manufacturers in 2014 amounted to around $2 billion.

Intel reported mobile chip losses of $3 billion in 2013. Those losses increased this year; Morgan Stanley analyst Joseph Moore recently estimated that Intel's Mobile and Communications Group will lose $4 billion in 2014. That's an astounding $7 billion lost across two years, three years after Intel announced its partnership with Google to support Android.

"While we do expect that [Intel] phasing out tablet subsidies over the course of 2015 will cause modest reduction in losses, it could also blunt the company's momentum in tablets significantly," Moore wrote. "Eliminating these losses would require either massive revenue gains, or massive expense cuts, and we don't see a clear scenario for either of them."

Intel nostalgic for its x86 PC monopoly

While Intel is clearly trying to prop up its crumbling x86 1990-era WinTel empire, its current high subsidies are also an acknowledgment of Apple's increasing power. Apple's ability to sell high volumes of high-end products has given it the leverage to demand favorable prices and terms from its suppliers, including Intel.

Intel's massive Atom subsidies to other PC makers make it clear that the chip maker would prefer a return to the WinTel era, where it sold expensive chips to a wide variety of manufacturers who lacked any differentiation or price negotiation power, and where its proprietary chip design couldn't be easily copied.

Intel's co-rule with Microsoft effectively forced virtually every PC maker to adopt Intel chips and Windows software (with the notable exception of Apple) at whatever price the WinTel monopoly decided to charge.

Intel welcomed Apple's Macintosh to the world of x86 chips in 2006, but by 2010 the chip maker had created an UltraBook Fund aimed at getting PC manufacturers to produce machines that looked like MacBook Air clones. Intel also floated a copycat Mac mini design.

Intel's backstabbing style of partnership with Apple appears to have pushed the Mac maker toward investing in its own custom processors for iOS devices. Apple's hardware profits have since financed the development of new chip technology that is not only better than Intel's mobile Atom, but now threatening to rival the chip giant's mainstream desktop processors.

Apple's iPad busted the WinTel trust

Around 2008, Intel expected Apple to adopt its mobile x86 Silverthorne chips (later rebranded as Atom) for its new iOS tablet. However, when the iPad appeared in 2010, Apple instead used its own A4, a customized ARM chip that was also used to power iPhone 4 later that year.

A4


At the beginning of 2011, Microsoft also snubbed Intel by showing off what would later be named Windows RT, a project to get Windows working on ARM chips--including the Qualcomm Snapdragon, TI OMAP and Nvidia Tegra chip families--in order to keep low end Windows PCs, netbooks, tablets and hybrid 2-in-1 devices competitive with Apple's increasingly popular iPad. Intel's Atom chips were clearly unable to match the A4 iPad's battery life.

Jilted by Microsoft, Intel subsequently rushed to support Google's Android 3.0 Honeycomb also in competition with iPad, offering makers fat subsidies for building Android tablets using Intel Atom chips.

Reversal of fortunes for WinTel

Working separately, Intel and Microsoft both failed spectacularly. Over the past two years, iPad sales have remained an empire, selling 70 million units per year. Windows RT ended up an unmitigated disaster.

Microsoft spent two years delivering Windows RT, then failed to support existing Windows software on ARM products like its own Tegra-powered Surface RT. When Apple moved Macs to PowerPC in 1994 and then Intel chips in 2006, it did the extra work required to support existing Mac applications on its new hardware, setting the expectation that Windows RT would, too.

Microsoft apparently thought that Windows was a valuable brand that people would go out of their way to buy even if it didn't work in the minimally utilitarian fashion that people expect from products bearing a Windows logo.Microsoft apparently thought that Windows was a valuable brand that people would go out of their way to buy even if it didn't work in the minimally utilitarian fashion that people expect from products bearing a Windows logo

Intel's Android partnership resulted in the Atom-powered 2012 Motorola RAZR i phone, which Android fans hailed as a new savior until it mysteriously disappeared. While failing to find interest among phone makers, Intel has pushed hard to force Atom into Android tablets, at great expense.

Intel's Atom chips are approaching shipments of 40 million this year, after reaching 10 million in 2013. However, Atom shipment growth has come directly from Intel's liberal subsidies; shipments are expected to collapse as soon as Intel stops paying subsidies, as it plans to do next year.

Intel CEO Brian Krzanich "is laser focused on [reaching] 40 million tablets," Intel's chief financial officer Stacy Smith stated during a conference call with analysts in April, as reported by CNET.

Intel buying Atom tablet market share


Krzanich said 80-90 percent of tablets Intel was subsidizing were Android, the rest ran Windows. "The majority is in $125 to $250 range," he detailed.

Intel's mobile Atom chips are cheaper and less profitable than its conventional x86 desktop-bound processors, so much of the expensive progress in selling Atom-based netbooks and tablets has come out of the flesh of Intel's more lucrative PCs shipments, a sort of "friendly fire" casualty stemming from its war on iPad.

Rather than continuing to spend billions on Atom subsidies, Intel now plans to license its x86 Atom, 3G and LTE baseband IP to Chinese fabless chip designers including Rockchip, Spreadtrum and RDA Microelectronics, following a licensing model similar to ARM or Qualcomm.

Those partnerships expect to launch new "SoFIA" chips by the middle of next year, which Intel hopes it won't have to continue to subsidize. However, that move will also result in Intel collecting far smaller IP royalty payments while its new chip design partners earn most of the money in selling finished chips to tablet manufacturers.

Intel's Atom bombs the benchmarks

It's also not clear why Intel seems to think Atom is competitive with ARM. "We don't take any competition lightly, but we're confident that our Intel Atom (Bay Trail) processors will continue to be the performance and performance per watt leader," an Intel spokesman was cited as saying in a report by EETimes.



However, Intel's Bay Trail Atom Z3745 used in Lenovo's Yoga Tablet 2 Pro (a top scoring Android tablet) delivers CPU benchmarks closer to a two year old iPad 4, while its "Intel HD" graphics deliver the worst GPU benchmarks of any recent tablet we tested, and about one quarter the scores of iPad Air 2.

Intel apparently thinks that Intel is a valuable brand that people will go out of their way to buy even if it doesn't work in the minimally utilitarian fashion that people expect from products bearing a Intel logo.
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Comments

  • Reply 1 of 217
    Nothing to see here. Just more click bait
  • Reply 2 of 217
    hill60hill60 Posts: 6,989member
    Nice one, two punches, keep keep up the good work.
  • Reply 3 of 217
    hill60 wrote: »
    Nice one, two punches, keep keep up the good work.

    Yup, Intel has performed so poorly that Apple has given up with them in the Macbook Air, Macbook Pro , Mac Pro, iMac 5k, and the Mac mini
    .. Oh wait EVERY MAC USES INTEL
  • Reply 4 of 217
    Quote:

    Originally Posted by staticx57 View Post





    Yup, Intel has performed so poorly that Apple has given up with them in the Macbook Air, Macbook Pro , Mac Pro, iMac 5k, and the Mac mini

    .. Oh wait EVERY MAC USES INTEL



    This is the mobile market, which is much larger than the PC market. 

    Apple is selling ~50M iOS devices with Ax vs the ~5M Intel Macs it sells.

     

    Intel wants to be in mobile, which is why it is paying OEMs to use its stuff. Even that isn't working. And that's pretty sad.

     

    Apple doesn't have to pay people to use iPads, or even Apple Maps.

  • Reply 5 of 217
    Apple has been selling tens of millions of iPads in competition with a series of loss leader giveaways from <a href="http://appleinsider.com/articles/14/04/11/exclusive-apple-vs-samsung-docs-reveal-galaxy-tab-was-a-flop-and-samsung-knew-it">Samsung</a> and regular fire sales of flop tablets, including the HP TouchPad, BlackBerry PlayBook, Motorola Xoom, Dell Streak, Microsoft Surface, Cisco Cius, HTC Flyer, Google Nexus and Amazon Kindle Fire.
    Google Nexus a "flop tablet".
    Seriously.
  • Reply 6 of 217
    hill60hill60 Posts: 6,989member
    staticx57 wrote: »
    Yup, Intel has performed so poorly that Apple has given up with them in the Macbook Air, Macbook Pro , Mac Pro, iMac 5k, and the Mac mini
    .. Oh wait EVERY MAC USES INTEL

    How long will they keep subsidising shitty tablets destined for the land of forgotten toys?
  • Reply 7 of 217
    hill60hill60 Posts: 6,989member
    lilsmirk wrote: »
    Google Nexus a "flop tablet".
    Seriously.

    Come back when they've sold fifty million, hang on make that ten million.
  • Reply 8 of 217
    Quote:

    Originally Posted by LilSmirk View Post





    Google Nexus a "flop tablet".

    Seriously.



    If you think it was not a flop, then who commercially benefitted from Nexus sales? Asus didn't, and Google didn't. 

     

    A product that costs more to make that it earns in revenues is most definitely a flop.

     

    There are some Android apologists arguing that Google is "successful" in the sense of keeping itself busy and showing its licensees how they could be making money if they only tried harder, but that's sort of ridiculous bullshit. No Nexus product has ever been a legitimate commercial success. 

  • Reply 9 of 217
    It's articles like this which make me have to pinch myself every now and then to make sure I am not dreaming. What bizarro world is this where the competition has problems even giving their tablets away at cost, while Apple has no problems selling theirs at a healthy profit? (????)?
  • Reply 10 of 217
    Quote:

    Originally Posted by Corrections View Post

     



    If you think it was not a flop, then who commercially benefitted from Nexus sales? Asus didn't, and Google didn't. 

     

    A product that costs more to make that it earns in revenues is most definitely a flop.

     

    There are some Android apologists arguing that Google is "successful" in the sense of keeping itself busy and showing its licensees how they could be making money if they only tried harder, but that's sort of ridiculous bullshit. No Nexus product has ever been a legitimate commercial success. 


    that's it DED, keep up your reputation of journalistic integrity and replying with thoughtful insightful responses to posters and refusing to respond with insults and petty mindedness. :rolleyes:

  • Reply 11 of 217
    Quote:

    Originally Posted by hill60 View Post





    How long will they keep subsidising shitty tablets destined for the land of forgotten toys?



    Don't these people even consider the ecology?  What's the point of dumping crappy tablets on consumers that they're not even going to use?  Android has become the waste dump of tech because of Google's refusal to license the OS.  They should have put some restraints on who can build Android devices and at least have certain standards.  Wall Street is no better with their constant whining about major market share over everything else.  Wall Street doesn't care if a company is selling crap as long as it's selling a lot of crap.  They get all happy when they hear Apple is losing market share to some $70 Chinese white box tablets.  Who even uses that junk for more than a week.  You get an iPad and you're able to use it for a few years and that's a good thing for the consumer and the ecology.  Maybe a company can't sell as many but why should consumers have to keep buying new devices and discarding them every year or so.  Intel should just get out of the tablet business and make processors for something else.

  • Reply 12 of 217
    asciiascii Posts: 5,941member

    Intel will close the gap eventually. Chip design is not magic and they are not stupid. And while they're playing catch up, they have to keep an x86 ecosystem alive in that space, hence the subsidies.

  • Reply 13 of 217
    that's it DED, keep up your reputation of journalistic integrity and replying with thoughtful insightful responses to posters and refusing to respond with insults and petty mindedness. :rolleyes:

    What did you find incorrect or offensive ?
  • Reply 14 of 217
    appexappex Posts: 687member

    And yet Intel x86 is a must for true compatibility.

  • Reply 15 of 217
    richlrichl Posts: 2,213member
    Quote:
    Originally Posted by Corrections View Post

     

    No Nexus product has ever been a legitimate commercial success. 


     

    I'd love to see you back up such a blanket statement with some evidence. 

     

    For example, how many Nexus 5 units have been sold? What's the BoM cost of a Nexus 5? How much did R&D cost for LG?

  • Reply 16 of 217
    Excellent analysis. I've also been watching the slow motion train wreck that is coming to the mobile electronics world soon. I've watched it happen in the PC Industry in the 2000's from the inside at Gateway and I can see it happening again.

    I knew that Apple's higher prices were due mostly to higher material costs so it puzzled me how some of these cheap Android tablets could sell for so low. I thought either you use cheaper components or older tech. I forgot about subsidies. This makes a lot of sense.

    Robert Perez
  • Reply 17 of 217
    rogifanrogifan Posts: 10,669member
    abazigal wrote: »
    It's articles like this which make me have to pinch myself every now and then to make sure I am not dreaming. What bizarro world is this where the competition has problems even giving their tablets away at cost, while Apple has no problems selling theirs at a healthy profit? (????)?

    Since the competition doesn't release sales figures how do we know whether they're having problems or not? The only thing we do know is iPad sales have been declining. Where is DED's feature on that?
  • Reply 18 of 217
    The UltraBook program, where Intel published the blueprint for MacBook Air copy-cats, deserves more consideration:

    Why go after a client's (Apple) product line like that? MacBooks already had Intel chips. Was it a tactic to bully Apple into using Atom for mobile?

    The Atom chip wasn't, and still isn't, power efficient/fast enough to *earn* its way into iOS, so Intel bullied.

    That is what monopolists do.

    Intel shouldn't be surprised when Apple moves the Mac to ARM. Two years later the rest of the OEMs will have to follow Apple's lead. Good-bye, Intel.
  • Reply 19 of 217
    The non Apple approach to the electronic business. Spend money to lose more money. LOL
  • Reply 20 of 217
    I think the more important point here is that the PC chip business is a $40bn per year business with a 0% rate of growth and the Tablet chip business is a $4bn per year business with 20 growth (Source: Strategy Analytics). This could see the Tablet market overtake the PC market in less than 10 years.

    At present Intel have less than apps 15/20%, QTMC (Qualcomm & TSMC) 40/50% and ATMC (Apple & TSMC) apps 20% of this market.

    At some point in the near future the PC market will continue its decline and Intel will see it's future reliant on cloud growth. However, it will also find that ARM is competing in this market. So if we look at the growth markets of the future: IOT, Cloud, Tablets and Smartphones. It is possible that Intel could be irrelevant in 3 of these 4 markets and facing stiff competition in the 4th i.e. Cloud. This is a bleak scenario for intel and therefore I presume it has no choice but to seek to buy a toehold in the tablet market.
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