How much is Atom hurting Intel's bottom line?

While netbooks have given Atom a nice ride, some say the low-cost chips are hurting profits -- on multiple fronts

With netbooks' surprise success, Intel Corp.'s Atom processor has become an unexpected money-maker during a down period, bringing in a cool US$719 million since its debut about a year ago.

But look beyond the immediate gain and Intel's cheaper CPU could be cannibalizing hundreds of millions -- or even 1 billion -- dollars from sales of its more profitable Core 2 mobile processors.

While Intel and a leading analyst deny Atom is a loser, others have said it is clearly cannibalizing sales, and one analyst now says Atom is hurting Intel on the supply-side as well.

Intel didn't report any Atom revenue in Q2 2008. But in the subsequent three quarters ending in March this year, it has reported $200 million, $300 million and $219 million in revenue, respectively.

Atom sales, however small in the context of Intel's overall revenue ($7.1 billion in the most recent quarter), would appear to be one of Intel's few bright spots. Sales were down 26% year-over-year, due to slowing demand for PCs.

Netbooks -- net loser?

Gartner Inc., has presented convincing evidence that Atom netbooks are cannibalizing potential sales of regular notebook PCs. For instance, PC revenues during the key Christmas quarter fell as much as 20% year-over-year, despite a 1.1% increase in the number of PCs sold, Gartner said.

Now, Robert Castellano, an analyst with The Information Network is saying that Atom is hurting Intel on the supply side, because Intel is forced to manufacture the low-cost CPUs at the same state-of-the-art 45nm wafer plants it uses to create its Penryn family of Core 2 processors.

Intel sells Atom chips for about $29, versus the several hundred dollar average selling price of Penryn mobile CPUs, which include dual and quad-core chips, Castellano estimates.

Each typical 300-millimeter wafer can yield 2,436 Atom CPUs, versus 660 of the larger, more powerful Penryn chips, Castellano told Computerworld. Despite the four times greater yield in Atom chips, that doesn't make up for the greater profit Intel reaps from each Penryn sale, he said.

Using available data from Intel and third-party market researchers, Castellano has calculated that Atom has pulled more than 1 billion dollars from Intel's bottom line, resulting in the 55% year-over-year drop in the company's Q1 net income.

"[Intel's margins] would've been higher if they didn't make Atom processors [in-house]," he said. "I think Intel is not telling people the truth, which is that they can't make a $29 chip at a profit."

Castellano said that Atom is the real reason for Intel's alliance with TSMC Co.

When the tie-up was announced in March, Intel emphasized that TSMC would help it boost Atom in the still-tiny Mobile Internet Device market as well as penetrate the smartphone market dominated by ARM Holdings PLC.

Intel's real goal, he argues, is to offload production of Atom CPUs for netbooks to TSMC, a Taiwanese chip foundry, to reclaim space in its own production lines for its profitable Penryn chips.

An Intel spokesman did say that the chipmaker hasn't publicly stated which kinds of Atom CPUs TSMC will be manufacturing. But that's because, at least in part, "we're still working on the exact details with them," he said.

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