Intel justifies tablet subsidies

Intel CFO Stacy Smith has raised an eyebrow or two at Barrons when he popped around for tea and biscuits.

He was facing tough questions about a report penned by Bernstein Research’s Stacy Rasgon , who speculates that Intel will be selling tablet chips at or below cost. Rasgon pointed out what seemed to be an embedded cost, or implicit cost, if you will, of $51 incurred by Intel for each tablet chip shipped, including subsidies, in terms of the impact to gross margin.

Smith did not deny that is what Chipzilla was up to but said “Anyone who thinks we have a $50 cost for these chips is wrong”.

He said that the special costs Intel is incurring that are pushing down gross margin for the company this year are not the cost of the chip itself.

Rebates, in the form of “contra revenue,” and one-time engineering fees, called “NRE,” are meant to reduce the “total bill of materials,” which includes the higher cost of things such as DRAM and other circuitry that must go along with Intel’s tablet chips.

Smith said that the chips themselves will maintain “competitive prices” compared to offerings from other vendors, he insists, without Intel having to sacrifice gross margin, even for tablets whose retail price is $199 or lower.

He added that Chipzilla can cost-reduce to match the lower prices of such products, noting that the cost to Intel to produce an Atom chip is one-fourth the cost of its top-of-the-line “Core i7” parts.

New versions of Atom chips next year, “Broxton” and “Sofia,” will bring down Atom’s costs further, Smith said/

This cunning plan will be in operation when Intel flogs Quark, some in the single-dollar price range. Quark is the new line of chips for smart wearable computers and such, introduced late last year.

Smith said he had no fear of lower price points because it was in the nature of technology for prices to come down and for things to become more and more useful, so that people adopt the technology.

Intel will still get paid a competitive price for its chips, across different competitive segments, he claimed.

“We were originally targeting the $500 tablet market with our chips, because we have been bringing high performance into that market. But the bill of materials for Atom chips at this point has very little to do with the SOC 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. That takes a little time to do. But by the end of this year, the bill of materials delta, if you will, gets pretty small,” Smith said.