In late 2013, Intel (NASDAQ:INTC) announced that it planned to capture significant unit share in the tablet market during 2014 by providing "contra-revenue" subsidies alongside its Bay Trail-T tablet platforms. These subsidies, per Intel, were provided because Intel's tablet processors required a much more expensive platform bill of materials than what solutions from its competitors did.
Interestingly enough, an article popped up in DigiTimes on Sept. 25 claiming that Intel's tablet customers are "keen to procure Bay Trail processors." The reasoning given is that Intel is about to put an end to the hefty discounts that it has been providing with Bay Trail.
According to DigiTimes, Bay Trail processors are currently priced at $12 with $8 and $4 discounts provided for Android and Windows tablets based on the chips, respectively. In contrast, Intel is reportedly charging $15 for its newer Cherry Trail chips and only plans to offer discounts of between $2 and $3 for the chips.
DigiTimes says that this "discount cancellation" could ultimately lead tablet vendors to choose chips from competing chip suppliers.
This leads me to wonder: "Can Intel grow its tablet chip shipments in 2016?"
It really depends
When Intel announced its "contra-revenue" program in 2013, the company made it clear to investors that these contra-revenue subsidies were meant to act as platform cost equalizers. Allow me to illustrate this.
Suppose that Intel charges $12 for a Bay Trail processor and that chip requires $30 in surrounding bill of materials in order for a tablet vendor to use it. This means that against a $12 chip from a competitor that only requires $22 in surrounding bill of materials, Intel is at a fundamental cost structure disadvantage.
The point of the "contra-revenue" program is that in order to give its chips a fighting chance in the marketplace, it would provide tablet makers with the difference in bill of materials cost relative to competing chip solutions.
If Intel's "discounts" were simply "platform bill of materials offsets," then as long as Intel's future tablet platforms can be implemented with a competitive bill of materials cost, then the reduction of the subsidies shouldn't have a material impact on the company's market share in tablets.
Now, if these discounts went beyond mere platform bill of materials cost offsets, then I would expect Intel to lose share as the company tapers off these payments.
We know Intel plans to reduce its mobile losses further in 2016
In 2014, Intel's mobile group lost a whopping $4.2 billion. Part of this was due to the "contra-revenue" payments that the company provided with each of the roughly 46 million tablet chips that it shipped, but I believe a larger part of this was the fact that operating expenses are quite high while revenues remain quite small.
Intel told investors at its 2014 investor meeting that it planned to bring its losses in the mobile group down by $800 million during 2015, and as of its most recent earnings report, the company is on track to that.
In addition, although Intel executives (understandably) declined to give precise guidance for 2016 at last year's investor meeting, they did indicate that the losses would further come down and that the mobile group would become gross margin positive during the first half of 2016.
In order to achieve these goals, I believe that Intel will have to both improve the competitiveness and cost structures of its mobile products and, at the same time, continue to ship significant volumes of tablet processors.
Intel should give more detailed guidance for its mobile group at its investor meeting which is expected to be held this November. At that time, investors should have a better idea of the company's tablet unit shipment and growth goals as well as its longer-term business strategy in the broader market for mobile processors.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends 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.