With the traditional PC market in a long and steady decline, chipmaking giant Intel is turning to tablets in a big way. In the company’s most recent earnings call, CEO Brian Krzanich said that he hopes to get Intel’s chips into 40 million slates this year, a figure that would mark a 400% year-over-year increase.
That’s a lofty goal, to be sure, but Intel has one good reason to be confident: it’s paying tablet manufacturers, in part, to use its chips in the first place.
The key words here are “contra revenue.” That’s how Intel is officially terming its aggressive subsidization strategy, and as noted by PCWorld and CNET, it’s something that the company openly detailed at an investor’s meeting this past November.
There, Intel CFO Stacy Smith described the main reasons for the company’s new approach: its Bay Trail chips are designed for higher-end, mostly Windows 8 tablets, and those are struggling. Intel wants to make hay with cheaper Android and Windows slates, which are not struggling, but those are already powered by processors from Samsung, Qualcomm, and the like.
So, in order to penetrate that more lucrative market, Intel is going to its warchest. It’s covering the relatively high component costs that come with using Bay Trail over a typical ARM chip, and it’s also helping OEMs with “nonrecurring engineering,” or the cost of porting an ARM-based tablet’s design over to Bay Trail.
In Smith’s words:
“Our goal is to quadruple the tablet volume to get to north of 40 million units…We want to start building momentum in a very significant way in 2014. In order to do that, we’re going to be aggressive in the market working with our customers. We’re working with them from the standpoint of providing nonrecurring engineering, where we’re helping them port over designs.
“And we’re being aggressive with them in terms of providing contra revenue to them in order to help them through the bill of materials that our product line drives until we can get to a bill-of-materials-reduced platform, which kind of happens over the course of 2014.”
This model is going to result in a “significant increase in the operating loss” of Intel’s tablet segment, Smith said, but that won’t be a major issue if it helps the company achieve that 40 million tablets sold projection. Intel has generally been slow to move more of its resources away from the traditional PC game, but its hope is that incentivizing OEMs to use its products will help it make up for lost time.
Krzanich confirmed during the company’s most recent earnings call that “the majority of projects we have in 2014 use some level of contra revenue,” so the results of this strategy will be in consumers’ hands sooner rather than later. Intel is expected to introduce two new Atom chips next year — codenamed SoFIA and Braxton — and Krzanich says those shouldn’t be as expensive to implement into a wide spectrum of slates, as Bay Trail is today. But since Intel is stuck with Bay Trail for the time being, it’s going to do whatever it takes to not fall behind in an increasingly crucial tablet category.
Intel has flirted with the contra revenue strategy before. In 2011, it launched an Ultrabook Fund that invested $300 million into companies that were working on hardware and software designed for the slim style of notebooks.
We’ve reached out to Intel for comment on the contra revenue model and the rest of its 2014 tablet plans, and we’ll update this article when/if we hear anything back.
Whether or not any of this will actually work for Intel is still up the in the air, but we should be seeing more cheap Bay Trail-powered tablets in the near future either way.
Be sure to read our recent editorial Mid-Range Tablets Will Turn Microsoft Around.