Intel Hints of Possible Premium Prices for Penryn Processors

It will be a bumpy ride for Intel to that 51% annual gross margin figure, though, as Bryant explained...three times, for those who couldn’t follow. For the next quarter, he projected gross margin would drop to 48%. One reason may be that the cost of unsold inventory will increase – with Intel making 2006’s rendering obsolete as soon as 2007, the company can’t expect to make as much on those closeout models. Couple that with the startup costs, especially with Intel switching to HK+MG for smaller, cooler transistors and faster switching.

But for the second half of this year, Intel projects gross margins to soar perhaps as high as 54%, resulting in that 51% average for the year. Analysts asked, with 65 nm Core 2 Duos selling for cut-rate prices, certainly 45 nm models must be doing more than balancing out the mix in order for Intel to achieve that 54% mark. Though Bryant pointed to cost-cutting measures as contributing to that goal, he would not exclude the possibility of price premiums.

As we’ve noted in the past, manufacturers often price their CPUs across the board based on an exponential performance curve. The high end of that curve is often the newest CPU, which sets the peak from which the rest of the product line falls in price. So even though a company can “target” the enthusiast buying segment with its high-performance processors – a far smaller segment than the mainstream consumer or the volume business purchaser – that enthusiast price benchmark often sets the tone for the rest of a company’s pricing strategy.

Enthusiasts often buy their high-priced, premium systems from exclusive OEMs like Alienware, VooDoo PC, and Falcon Northwest. For an enthusiast-based pricing strategy to work, a manufacturer has to gear its service and support to be able to respond to OEM clients, which is much more like dealing with consumers than when a company plays more to “the channel” – which refers to the sales force that deals directly with businesses. Enterprises buy in volume, but more often they purchase for value than for performance.

So Otellini’s comments on behalf of OEMs are indeed very telling. He was asked whether Intel was concerned about the possibility of OEM customers – who are typically “flighty” - defecting to AMD in the second half of this year, when its next generation CPUs are due to appear. “Systems integrators are typically relatively small companies,” Otellini responded. “They live and die by the competitiveness of their product lines. They have moved very rapidly to our products, and as long as we can continue to give them a) the best products and b) the best support – and critical to that support is our terms and conditions, our ability to supply in volume the parts they need when they need them, and not constrain them – I think they’ll continue to do business with Intel. I’m pretty confident about that.”

But Intel’s rosy projections are contingent upon, as CFO Bryant said, its capability to absorb startup costs. Since the OEM market’s allegiances can flip back and forth like an Oklahoma wind gust, can Intel truly be so certain it can reach these goals?

Maybe...not, remarked Bryant with his typical candor: “Obviously we think we can. If the market’s softer than we think, then we could end up with issues. But we actually do build plans out multiple years, and [in] those build plans, our capacity is utilized.”

The end benefit of Intel’s restructuring is that the company managed to post a decent profit this last quarter, even though the costs of goods sold actually rose, and even though sales were basically flat or lower in some segments. The next chapter in the company’s history may focus on whether it can use that cadence Otellini talked about as a drumbeat – not so much a tick-tock as the sound of a competitor’s war plans being crushed beneath Intel’s steadily marching feet.