In regions where customers typically buy smartphones coupled with a two-year contract, smartphones actually seem pretty cheap. As of writing, an iPhone 5s -- Apple's premier smartphone -- costs just $199 with a two-year contract from Verizon Wireless!
What customers generally don't think too much about is the fact that this "$199" smartphone actually sells for $649 without that two-year contract. See, the subsidy isn't really a subsidy -- it's more like a two-year payment plan. The remaining $449 is actually baked into customers' monthly service fees to the tune of $18.71 per month for a two-year contract.
While such carrier subsidies are ubiquitous in the United States, they're far less common worldwide, where the opportunity for further smartphone growth is. To enable that growth, handset vendors will need to focus on driving down unsubsidized smartphone prices at the low end. Google's Android One initiative, for example, seeks to bring $100 smartphones to emerging markets, beginning with India.
However, Intel (NASDAQ:INTC) thinks it can do even better.
PC giant Intel wants to drive it lower
According to a report from CNET, Intel hopes that its first integrated applications processor and 3G modem, codenamed SoFIA, will allow it to sell chips into low-cost 3G smartphones. How low cost? Well, CNET quoted Intel's Bill Calder as saying that SoFIA "could pave the way for smartphones costing as little as $50 in emerging markets."
Now, this is all well and good – the lower the costs of these phones, the higher smartphone penetration ultimately becomes, which means more chips sold -- but the real question here is whether SoFIA will ultimately make a difference to Intel or the fundamental competitive dynamics of the smartphone chip industry.
Intel needs some mobile credibility
As a PC and server chip vendor, Intel simply cannot be beaten -- it's a technological powerhouse that consistently delivers. However, as a mobile chip vendor, it has a very real credibility problem.
For example, in February of 2012, Intel announced it would bring to market its first LTE-capable smartphone platform by early 2013. It didn't happen, and to this day, there do not appear to be any Intel-powered LTE smartphones in the market (there are a few LTE-capable tablets, though).
Then, earlier this year, Intel announced two smartphone platforms -- Merrifield and Moorefield -- as well as a cutting edge, LTE-Advanced modem known as the XMM 7260. Intel had told the press that the 7260 would be in devices, on shelves during the second quarter of 2014 and that multiple design wins would be announced in the spring. Merrifield was supposed to show up during the first half of 2014, while Moorefield was scheduled to follow shortly thereafter.
None of that happened. Neither Merrifield nor Moorefield can be found in a single commercially available smartphone, and the XMM 7260 is missing in action, with Intel's latest statements suggesting that devices packing this modem are still a ways out. This kind of execution leads investors and customers alike to be cautious on Intel's offerings, particularly as the competitive environment for smartphones is brutal, and missing a beat can be deadly.
Can SoFIA build this credibility?
Though Intel played up its upcoming SoFIA 3G and LTE parts in the aforementioned piece published at CNET, the reality of the situation is that a dual-core processor -- as fast as that processor is -- paired with a 3G modem probably isn't going to have too much appeal in this market. The LTE version -- which should have a quad-core processor and be substantially improved relative to the 3G variant -- should be much more competitive.
However, with these initial SoFIA products, Intel isn't really playing to its strengths. These first chips are still going to be built at an external foundry (eliminating its cost structure edge) and they're going to be built on the same manufacturing technology that its peers will be using (eliminating its manufacturing technology edge).
That said, if Intel can deliver SoFIA on time and with the promised performance and feature-sets, it could serve to build real credibility for the company's future mobile efforts. That credibility, particularly as Intel builds its next-generation SoFIA products with its own manufacturing technology at its own plants, could go a long way to ensuring Intel's mobile future.
So, about those $50 smartphones...
It's worth noting that -- whether Intel is on-board or not -- the market is naturally going to try to find ways to enable ultra-cheap $50 smartphones. With SoFIA, Intel doesn't really have a fundamental cost advantage -- if anything, competitors like MediaTek and Qualcomm probably get better chip pricing from Taiwan Semiconductor because of their much larger scale -- and the jury's still out on whether Intel is cramming in more performance than its competitors are.
This all means that if Intel can power a $50 smartphone with its SoFIA platform, its rivals can, too -- at least for as long as Intel relies on the same external manufacturing partner for its chips as its rivals do.
Foolish bottom line
The smartphone chip market has proven exceptionally tough for Intel, and while it's great to hear that the company is planning on participating across all segments and price points alongside the rest of the industry, it'll be important to see if -- under the new CEO -- Intel can deliver on some of these big mobile promises. SoFIA will likely mark the beginning of this journey for Intel, but there's a long way to go, still.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Intel. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), Intel, and Qualcomm. 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.