During the Q&A session at the end of Intel’s Q1 2014 Earnings Conference Call, Blayne Curtis of Barclays asked a big question: ” . . . it’s pretty clear [the MCG (Mobile and Communications Group) business] is now losing $3 -$3.5 Billion, how do you think about this business? Obviously you’re trying to ramp the product set, you are a bit behind, you’re entering from the low end and that pricing seems quite tough, and you’re facing some subsidies that you need to do on the tablet side . . . Are there some milestones that you look at to get this business back profitable, or, maybe, would you consider this strategic enough that you would continue to run this as a loss?” (quoted from the Intel Q1 2014 Webcast)
Stacy J. Smith, EVP and CFO took the question. Smith emphatically affirmed the strategic importance of these markets: “It’s critical from two in one devices down to the Internet of Things” As to the MCG Group loss for the quarter, he noted: “We don’t go into these businesses thinking that we’re going to lose money. We believe we have a road map to get to profitability in that business.” (ibid).
Intel is a mature ISV. But the process for Intel to take the kind of new direction represented by the MCG product line is no different than would be the case for an early stage ISV attempting to come to market with, for argument’s sake, a new Cloud SaaS offer. In other words, the experience Curtis’ question brought under an analyst’s microscope included:
- a “Ready, Fire, Aim” product strategy. Intel chose to retool the Baytrail chipset from the PC market over to the tablet market. Opting for this method hastened their full scale entry to the tablet market. But the components, themselves, were brought to the task at a comparatively higher cost than comparable offers from Intel’s competitors.
- and a set of subsidies for OEMs for some of these higher costs
Presumably Intel’s rationale for opting for “Ready, Fire, Aim” was to quickly make a long overdue entry to the tablet market as a serious competitor. Smith noted why Intel’s market-leading experience producing SOC systems with the widest possible range of communications options promises to fuel their advance, which makes a lot of sense.
The rationale for the subsidies to OEMs is no different, I would argue, than the kind of “freemium” business model Cloud SaaS ISVs implement to persuade consumers to get started with their offers.
Disclaimer: I’m long Intel.
© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved