A new report from Taiwan's Digitimes claims that Intel (NASDAQ:INTC) has been very aggressively pricing its new Bay Trail-Entry tablet platform (more details can be found here). How aggressively, you ask? Well, if you believe Digitimes, Intel is asking less than $5 per unit for its lowest-end quad-core tablet processors. As investors, it is worth attempting to verify and understand this claim.
The key question: How much does it cost to build a "Bay Trail"?
Let's assume, for the sake of simplicity, that Intel is selling these chips at precisely $5. Now, we know that the die-size of Intel's Bay Trail (the same die is likely used across all variants) is 102 millimeters squared. Let's assume that Intel can yield these chips at roughly a 90% rate, and let's further assume a wafer cost of $2700 (for more details, see here). This would suggest -- with all said and done -- about 527 good chips per wafer. This works out to about $5.12 die cost.
On top of that, let's assume that it cost about $1.50 to package and test the dies. This implies a total cost of about $6.62 per unit. At first glance, then, one would suspect that if Intel is selling ready-to-go Bay Trail-Entry chips at $5, it is selling chips below cost. How can Intel pull this off without being accused of predatory pricing?
It's all about average cost
When we talk about yield, there are actually two types: functional and parametric. Functional yield simply refers to the number of units that aren't simply dead on arrival (i.e., they work). But just because a chip works doesn't mean it works to specification. Unfortunately, not all of the chips on a given wafer will be able to run at the top speed within the specified power envelope or have all of the features enabled.
So, a chip vendor has precisely two options here: Toss those not-so functional chips into the trash and raise the average cost of all of the other chips, or take what it can get for them, which would actually help overall profitability for the rest of the models by lowering the average cost. This seems to be what's going on given that the Bay Trail-Entry chips Intel is reportedly pushing for these low prices are far weaker than the top bin Bay Trails, which likely command between $10 and $20.
Just how much weaker are they?
At the Intel Developer Forum in Shenzhen this year, Intel showed the following chart detailing all of the current Bay Trail models (reproduced below).
The very top model is able to run all four CPU cores at 2.39 GHz and the graphics engine at 778 MHz. But the Z3735F and Z3735G, which are presumably the models that Intel is selling for dirt cheap, offer significantly lower memory bandwidth, a top four core CPU turbo of 1.58 GHz (two cores can run at up to 1.83 GHz), a graphics engine that maxes out at 646 MHz, and lower maximum display resolutions.
Low end market share gain highly likely
While the performance of these "crippled" Bay Trail chips is significantly lower than the very top bin models, this type of performance is still quite ahead of what Qualcomm (NASDAQ:QCOM) and MediaTek likely offer at the same price points in both CPU and graphics. If Intel is really pricing this aggressively, then investors should expect some pretty serious tablet market share gains in price-sensitive markets such as China.
For Qualcomm, this isn't so much of a problem -- it has the high end of the market largely sewn up at this point which means the vast majority of the profit share. But for the players that compete on price and not features, Intel's incursion into the space could be quite painful.