Behind in tablets, Intel pays firms to use its chips

Why is Intel confident that 40 million tablets will ship in 2014 with its Bay Trail processors? Here's one good reason.

Brooke Crothers Former CNET contributor
Brooke Crothers writes about mobile computer systems, including laptops, tablets, smartphones: how they define the computing experience and the hardware that makes them tick. He has served as an editor at large at CNET News and a contributing reporter to The New York Times' Bits and Technology sections. His interest in things small began when living in Tokyo in a very small apartment for a very long time.
Brooke Crothers
3 min read
Dell's Venue 11 Pro uses Intel's Bay Trail processor.
Dell's Venue 11 Pro uses Intel's Bay Trail processor. Dell

Intel wants to be a player in the tablet market in a big way this year. One way to make that happen is to bankroll a customer's product.

"Contra revenue," as Intel calls it, sounds innocuous enough. One of those murky financial terms that are ignored by people outside of the investment community -- and that's probably why it's been largely ignored to date.

Seeking Alpha, a site devoted to company earnings, wrote about contra revenue in November, and on Friday IDG News did as well.

Intel discussed its 'contra revenue' strategy in a fair amount of detail at its investor meeting in November. In order to get to 'north of 40 million' tablet shipments in 2014 it is implementing the program.
Intel discussed its 'contra revenue' strategy in a fair amount of detail at its investor meeting in November. In order to get to 'north of 40 million' tablet shipments in 2014 it's implementing the program. Intel

The upshot: Intel is, in essence, paying tablet makers to adopt its Bay Trail Atom chips because it needs to catch up.

"It is not unusual for us to put programs in place to incentivize customers and accelerate the market for our products, and we've been clear about our desire to grow market share in tablets," Intel said in a statement to CNET.

And Intel isn't exactly hiding the details either. It made the contra revenue program very clear back in November at its investor meeting.

Here's what Chief Financial Officer Stacy Smith said about the tablet market, its Bay Trail chip, and contra revenue at that meeting. Note that a lot of this is peppered with the kind of phraseology that only professional investors can readily understand.

Bay Trail...was designed for the high end of the tablet market...a lot of the growth is happening at the lower end of the tablet market. So, we made the decision implicit in that 4X ramp that we're going to take Bay Trail into a broad swath of the tablet market. And while it has great performance and features, it does not have the level of integration that you typically see at the lower end of the market and it's driving a systems [device] bill of materials...that's more appropriate for the performance segment of the market.

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.

The impact of taking Bay Trail into the broad tablet market including the value portion of the tablet market will be a significant increase in the operating loss in this segment and at a corporate gross margin level it's going to drive about a point and a half of gross margin negative impact in 2014.

This is by no means the first time Intel has done something like this.

Intel created the $300 million Ultrabook Fund in 2011.

The company stated at that time that the Ultrabook Fund will "invest in companies building hardware and software technologies focused on enhancing how people interact with Ultrabooks such as through sensors and touch, achieving all day usage through longer battery life, enabling innovative physical designs and improved storage capacity."

And going further back in the past, Intel had a program called Market Development Funds or MDF, which got the attention of the Securities and Exchange Commission.

Intel had several rebate programs at that time, including MDF and Mother of All Programs (MOAP) -- the latter was changed later to Meet Competition Program (MCP), according to the SEC. MOAP was problematic because it gave Dell a 6 percent rebate going forward on all of Dell's CPU purchases, the SEC alleged at that time.