Intel still losing billions in contra revenue

[lefty]

An interesting fact emerged from Intel's conference call yesterday. They are still losing money on contra revenue. Most people assumed that the contra revenue would stop after Intel left the Mobile market. This does not seem to be the case.
Excerpt from call:

Timothy Arcuri
Got it. Okay. And then I want to ask a question on the mobile losses. I know that you don’t break out MCG anymore. But I think I asked you last call about feeling good about this $800 million improvement in losses this year. So, I guess, that would get you to roughly a loss of $2.2 billion to $2.3 billion in the former MCG. Can you talk in light of the iPhone win, can you talk maybe how you think about the degree to which you could get further improvement in that number next year? Thanks.
Stacy Smith
Sure. So first-off let me just say as is our standard practice. We don’t talk about our customer, what technology they use inside their products in this space. So I’m not going to confirm or anything on a particular win. But I’ll take you back to the mobile last year. So, as you got right, we no longer have a mobile segment we haven’t for a while.

We had articulated that in 2015 we expected to improve the loss by $800 million we actually ended up closer to $1 billion. We said everything we know of what’s going on with counter revenue and investments and margin improvements and all of that. That we’d expect something on the order of an $800 million improvement in ‘16.
Everything I know from there would say we’re on-track or exceeding that just because we know this has gone through our restructuring, we’ve made some further disinvestments, as you just heard earlier, our volumes were little lower, our counter revenue is looking a little lower, the product margins all look good.
So, I’m not saying anything that say it’s smaller, if anything it’s going to be bigger in terms of the overall savings. And I do just want to reiterate it’s impossible for us to detangle it going forward.

So, last year Intel lost $2.2 billion because of contra revenue. This years it's going to be $1.4 billion.

 

[Portland]

Doesn't surprise me. It's another symptom of the state of society of the united states.

 

[Al Putman]

My interpretation is that last year (2015), Intel lost $3.2 billion in Mobile; and this year (2016), they will loose $2.4 billion. Per Intel Earnings Releases, the Mobile and Communications Group lost $3.148 billion in 2013 and $4.206 billion in 2014. A loss improvement of close to $1 billion would put MCG (now the former MCG) at about a $3.2 billion loss for 2015. Then another loss improvement on the order of $800 million would put MCG at a loss of about $2.4 billion for 2016.

 

[lefty]

My interpretation is that last year (2015), Intel lost $3.2 billion in Mobile; and this year (2016), they will loose $2.4 billion. Per Intel Earnings Releases, the Mobile and Communications Group lost $3.148 billion in 2013 and $4.206 billion in 2014. A loss improvement of close to $1 billion would put MCG (now the former MCG) at about a $3.2 billion loss for 2015. Then another loss improvement on the order of $800 million would put MCG at a loss of about $2.4 billion for 2016.

Thanks for that! The info in the call didn't make it too clear.

 

[JeffreyHF]

So, that begs the question, what did they have to do for Apple to get them to "buy" their modems for the iPhone7? Now that independent testing confirmed the performance inferiority of the Intel modem, versus the QCT counterpart, perhaps Intel essentially paid Apple to dual source with them, for bragging rights?

 

[count]

My translation: "Mobile still sucks for us, it sucks less than it used to, but it still sucks enough that we don't want to tell you how bad it sucks."

 

[Daniel Nenni]

Hopefully Apple got a good price on those Intel modems:

Cellular Insights put both versions of the iPhone 7 through a number of tests to see how well they could connect to a wireless network under everyday conditions. The firm tested across three different LTE frequency bands to simulate how the phones would perform in different countries and with different carriers. It also tested varying levels of signal strengths.

The tests demonstrated that Qualcomm-powered iPhone 7s are able to consistently establish stronger connections to LTE networks than Intel-powered iPhone 7s. Qualcomm modems outran Intel modems by 30% in overall performance, and 75% when the signal was at its weakest.

Another chip-gate coming..........

 

[count]

Here is another interesting thought experiment when it comes to Qualcomm vs Intel in the iPhone. Lets say the rumored QCOM NXPI deal goes through. NXPI is the sole supplier of Apples NFC chip. Qualcomm could integrate NXPI's NFC technology into a future chipset and go to Apple as say hey, we can make you a wireless modem with integrated NFC, bluetooth, and Wifi and you can cut all of those items from your BOM. Intel simply wouldn't be able to compete with a solution like that.

 

[mbello]

I would like to understand Intel's rationale to their modem business. Can anyone enlighten me?

So basically, Intel's core capability is in making fast processors with good perf/watt ratios.
Yet, they found out that making the mobile SoC is not worth it and gave up on that part of the mobile business. Essentially, they decided they could not win on the mobile segment doing what they do best.

But yet, they decide they have a chance selling modems!? What makes the mobile modem business so attractive to Intel? When they were offering the SoC I understand the relevance of also having an offer for the modem. But why did they drop the SoC and kept the modem?

I know they spent a lot on M&A in order to have a sound modem business, so is this just to not look stupid on all those investments?

 

[robertschulz]

Another aspect in this discussion:

The Intel modem is produced by TSMC.
So the value chain is rather different from their x86 business.

 

[benb]

With cellular modems, the market price is less than transparent. It is a BtoB market, with contracts and negotiations behind closed doors. Nevertheless, we can speculate what the economics are.

On CDW, a cellular modem appears to go for $100-200 each. That is a market with some profit potential. So it attracts competition. This is the nature of capitalism. There are two basic competitive strategies--differentiation and low cost. If you are a successful technology organization, you can have 6-12 months of monopoly on differentiation, as a general rule.

Intel's cellular modem staying on the 28nm node, having "good enough" but not great performance, leads to the conclusion that it is a low cost strategy, not a differentiation strategy. And Apple appears to have taken them up on that offering.

Should Qualcomm worry? They are in a different market from Intel. They will continue to differentiate, and win that way. Intel will continue to drive low cost, and win that way. And make no mistake, Intel is winning--they had an amazing quarter. How this becomes a big conspiracy on this board, insinuations about Intel cheating--well I think my explanation is a simpler explanation than some elaborate conspiracy.

 

[JeffreyHF]

As networks rapidly evolve, "good enough" today, will no longer be good enough. Intel isn't winning in modem technology, nor in the market place. All of the billions spent on buying modem teams and subsidizing with "contra-revenue", can never be recouped. Were it not for server and computer chip profits, Intel couldn't bury mobile losses in the books.
The iPhone "modemgate" travesty is just the beginning. For how long will sycophantic fanboys and fangirls tolerate paying top dollar for inferior moem capabilities, when the Chinese offer far better for far less?