The Gravy Train Is Over 1928

It’s Not That Bad, But It’s Hardly Good

Some places are reporting that Intel’s profits were down 96%. While the number is accurate if you count in non-business activities and accounting adjustments, the processor business didn’t do quite that badly. Profits in the Intel Architecture Group dropped 60% (from $3.3 billion to $1.3 billion) from those of a year ago (Profits dropped 8% from the quarter before),

None the less, that’s hardly good.

There’s some factors that are depressing Intel’s CPU profits that will eventually go away. For instance, making lots of huge PIVs in .18 micron is driving up Intel’s costs and costing them very roughly a third to a half billion dollars a year in lower profits. Going to .13 micron will make most of that go away.

However, even a half-billion is not $2 billion in profits Intel used to get but isn’t getting anymore.

Intel’s core problem is simply getting less money for the CPUs they do make. If they get $10 or $20 or $50 less per CPU, that essentially means $10 or $20 or $50 less profit on the CPU.

Intel got about $1.7 billion less in revenues from their CPUs than they did the year before. Most of that was due to lower prices, not fewer processors sold. If Intel had gotten the kind of prices they got a year ago, they would have done fine.

Intel doesn’t have the option of making less profit and offsetting it with greater sales.

AMD can try to play that game simply because they only have 20% of the market; there’s lots of at least theoretical room to expand.

When you have around 80% of the market like Intel, though, the only way “stack ’em high and sell them cheap” works is by greatly increasing the overall market. The CPU industry is just not that price sensitive (you wouldn’t buy four times as many CPUs if the price dropped 75%), and even if it were, Intel can’t build additional fabs in five minutes or even five months to meet the demand.

So long as AMD is viable competition (and it’s hard to see how price can ever be removed as a big element of that competition), and Intel feels the need to respond to that competition, I just don’t see “the good old days” for Intel ever coming back again.

Unless Intel can somehow knock AMD out as a serious competitor, I think we’re looking at a permanent reduction in profitablility. Not saying yesterday’s results are going to be typical from now on at all, but even when times get better, I just don’t see how Intel can get back to getting an average of $200 a processor and making around $120 gross profit on them again.

Intel will certainly have better days and years than last quarter. Maybe they can claw back half the difference between now and the glory days, but unless AMD can be killed or neutralized, the fat, happy days are over.

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