Intel (NASDAQ:INTC) has gained a sort of notoriety over the years for producing exceptionally bad graphics. For years, Intel would integrate some sort of barely passable graphics functionality into the chipsets that accompanied its microprocessors. With minimal research and development and transistor budgets allocated to graphics, these were hardly suitable for more than basic 2-D Web surfing. However, as personal computer sales have stagnated over the years, the chip giant has sought to increase the dollar content it can capture on the PC platform as a whole. Graphics have been a key opportunity to achieve this goal.
Better integrated graphics has driven richer mix
With PC sales stagnant, and margins squeezed and profits pressured, the original equipment manufacturers are seeking any opportunity to lower their costs. With an integrated graphics solution that is comparable to even a $30-$50 discrete graphics chip (so these aren't the high-margin, growing gamer chips), Intel can -- if its solution is good enough -- charge that extra $30-$50 for a higher-end integrated SKU. The pitch that Intel can then make is that its customers get a smaller board area and don't need to pay for separate GDDR5.
The goal for Intel here is very simply one of economics: By building better integrated graphics solutions, it can command more dollars per unit from the OEMs, all the while the OEMs don't actually feel any sort of "squeeze" since they're getting comparable performance but a lower systems bill of materials cost. That said, even though Intel continues to consume the very lowest end of the discrete market (and is inching up), it will need a significant leap in performance to push meaningfully further up the stack from current levels.
Illustrating the point
According to benchmarks from respected technology review site, AnandTech, the Intel Iris Pro 5200 (this is Intel's very highest-end integrated GPU paired with a custom 128 MB eDRAM) offers performance comparable to the NVIDIA (NASDAQ:NVDA) GT 640 desktop card/GT 650m mobile GPU most of the time (the NVIDIA chips are actually faster most of the time, for the record).
That's great and all, but NVIDIA has replaced the GT 640/650m with the GT 750/750M at roughly the same price points as their predecessors ($100 for the GT 750). Both offer pretty significant performance improvements over the prior generation, and both significantly outrun the Intel chip in terms of performance and performance per watt.
What of discrete graphics?
For gaming-oriented workloads, NVIDIA and Advanced Micro Devices are likely to do what is necessary to defend the GPUs that sell at the $100 price point and above (that's add-in board price -- chip content is likely less). This will be achieved by continuing to push the performance and power envelope through clever architecture and process technology improvements. Below that, Intel's integrated graphics should do a good job and continue to capture content share against the very lowest end of discrete. This may seem a negative for the discrete vendors, but that business has a very low average selling price and low margin. The losses there are more than likely to be offset by continued growth at the high end.
Intel has an interesting opportunity to continue driving a richer mix in its PC processors amid a stagnant market by increasing its content share. Beefing up its integrated graphics can probably capture about $50 of discrete GPU content via integration in a good number of the PCs that house its chips. But anything further than that may prove far more difficult as discrete vendors such as NVIDIA and Advance Micro Devices vehemently defend their turf.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel and Nvidia. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.