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Intel's Per-Chip Cost Averages $40
Fedorpheux writes "According to a report by the analysts at In-Stat, Intel's average cost per chip is about $40. These same chips, such as the Pentium 4s, can cost consumers up to $637. This $40 average cost has remained rather steady since 2003. This cost does not include money spent on marketing or development, but it does explain how Intel can continue its profits even in this era of quickly dropping prices in computer hardware."
...R&D costs will almost ALWAYS top manufacturing costs...
1. Profit!
The higher the technology, the sharper that two-edged sword.
does not include costs for marketing and development
Which, given that a product's true cost includes not only the per-widget cost to make the item, but also the amoritize costs of slaries & benefits, facilities used in production, third party contracts, marketing and advertising and probably a lot more that I'm too tired to think of right now, makes this number pretty useless, no?
Do you have any idea how much these manufacturing facilities cost? Here's something else you might not know: it doesn't cost apple 300 bucks to make an iPod either! Gasp!
Religion for nerds. Stuff that really matters
Considering that a HUGE amount of money gets put into research and making/updating the facilities to manufacture these processors, the actual costs are much higher.
Not to mention they have to pay salaries, benefits, etc...
"This cost does not include money spent on marketing or development"
Yeah, that would have been too... Honest? Thorough?
So what's the per-chip cost WITH all of the overhead?
"Ask not what your country can do for you." --John F. Kennedy
Dropping R&D and marketing, you'll get for microsoft:
price of CD: ~1$
price of office/windows XP: 340$/170$
profit: lotsa %!
$719 - xeon 3.6ghz 604
straight from your site. and while it doesn't say, it's likely that you can find higher end xeons (with gobs of cache) for a few grands
additionally, the cost quoted is an average per chip cost. i'm assuming this isn't limited to pentium 4 chips, but includes all chips that intel makes.
they contrast this $40 average cost with the consumer price of a p4, which is probably one of the most expensive chips. the average cost of making a p4 is probably much higher than $40.
That's pretty much a ridiculous way to describe things. Saying that it costs X to produce something, but ignoring the actual overhead is completely sophomoric, and an obvious attempt to pander to the corporations=bad and profit=bad crowds (never mind that only a large, profitable entity could possibly produce things like Xeon or AMD-64 chips and keep coming up with and delivering more, better, faster). It's like the people who think that they only cost their employer what they see on their pay stub. There's a little more to it, folks!
Don't disappoint your bird dog. Go to the range.
Intel's recurring costs are irrelevant to its business model. The bulk of the cost is in R&D and the fabrication plants. R&D at Intel is about $5 billion per year and the company has almost $16 billion in plant and equipment. Worse, Intel's fabs aren't really a long-term assets in the traditional sense. Unlike most manufacturing companies, Intel's plant and equipment goes obsolete on a time scale not that different from the chips. An old 130 nm fab or one using the old 8" wafers is increasingly obsolete. Even today, Intel is looking to replace its 90 nm fabs wiht 65 nm fabs in 2006 and 45 nm fabs in 2007. And at $1 to $3 billion for each new new fab, the money comes from chips.
The only way to pay for all this expensive equipment and R&D that is obsolete with a few years is to maximize revenue on every fab line. In that regard, Intel is in the same boat as the pharmaceutical and airline companies -- low recurring costs but huge upfront investments.
I'm not saying that Intel isn't hugely profitable only that the "cost" of a chip is much much higher than $40.
Two wrongs don't make a right, but three lefts do.
In other words, from the accounting standpoint, the variable product costs are $40/unit. There are also fixed product costs, period costs, overhead, etc. Intel certainly has profit margins, but they are sure as hell nowhere near what the blurb or article would lead one to think.
I would actually think that their margins are lower than AMD's, though their profits would of course be higher due to shear to volume.
Who knows what that $600 per chip is spent on. It doesn't matter. If $600/chip is "too much", then where are all the competitors that would rush in and scoop up all this easy money? As far as I can tell, only AMD is willing to try.
Consider how much money was made during the dot-com explosion. Investors were putting huge amounts of money into companies. Yet, with all the "price-gouging" that Intel does, most investors sit on the sidelines passing up the change to get in on these high prices.
So whatever that $600 is paying for, even if pure profit, it's still not incentive enough to get people to start a new x86 compatible processor companies. Apparently those with the money to do that think it's just too much trouble. Maybe that's really what the $600/processor is paying for -- all the trouble it takes to run a processor company.
The other thing is, what exaclty is "price gouging", except a complaint that you don't like the price? I could make that complaint about nearly everything. "Price gouging" doesn't seem to have much of an objective existance.
Intel's AVERAGE cost per chip is about $40. These same chips, such as the Pentium 4s, can cost consumers UP TO $637.
$40 is actually a hell of a lot for a chip. That explains why x86 really is not going to become a contender in low cost devices. OMAP parts etc cost sub-$20 to the customers.
Engineering is the art of compromise.
You stinking capitalist pig! How dare you point out the obvious.
I can't believe how people are so quick to react to this with some neo-socialistic view that the capitalist corporate scum are somehow raping us.
What really boggles my mind is that slashdot is, supposedly, a computer geek oriented user base. Software developers should understand implicitly how much money is spent trying to develop products before one is actually profitable.
Maybe it is the Seinfeld-Kramer idea of "write-offs". Could everyone think that all losses just get written-off into the ether and never affect the bottom line? The fact is the world, hell the universe, is governed by net calculations, not gross.
The thing is this comparison is extremely misleading.
Look, they averaged the costs overall production. They excluded development.
As a engineer ing this field let me tell you development costs are *huge*.
Moreover, some processors might cost $637 but those process cost a hell of a lot more than the average to manufacture... and that is the price you pay for the processors that come off the line with performance in the second or third standard deviation from the mean. There are not many of those processors (hard to make) + lots of demand => no shortages require high prices. The point being those those applications that can justify the cost are the ones that get the chip. This is about not wasting those chips on grandma's email computer while some scientist needs them--and to make that allocation in keeping with liberalism, i.e., without coercing people + corruption.
Anyone who was moved by this article should read
"Economic Calculation In The Socialist Commonwealth"
http://www.mises.org/econcalc/econcalc.pdf
Some numbers from their financial report...
For 2004, Intel had a net income of US$7.5 billion on revenue of US$34.2 billion.
Overall tax rate expected for 2005: 31%
(With 2004 earnings as a guide, taxes will be US$10.6 billion)
Their expected R&D budget for 2005 is: US$5.2 billion
Capital spending for 2005: US$4.9-5.3 billion
Overall, Intel pays 31% of their revenue in taxes. 30% in Capital spending and R&D, which leaves 39%, or US$13.4 billion, to pay salaries, benefits, cost of fabrication (not including the facility itself), cover the cost of their bad chips/wafers, and sending some cash to their stockholders.
Reading code is like reading the dictionary - you have to read half of it before you can go back and understand it.
I have a friend who works in IBM's fabs for nVidia chips and he was explaining to me that when you buy a top end chip, you have to pay for all the failed chips produced in order to get a good one. In the case of the 6800, he mentioned numbers along the lines of 20% when the 6800 was new. Obviously, as the 90nm (or 120, I forget) matured, this number goes up, but even so, they have to offset 4 other failed chips for every chip they ship.
This is probably not as bad for x86 chips, as they can just underclock less well fabed chips, but the point remains: at $40 a pop failure can get expensive fast. The article mentions that the $40 figure doesn't take this into account...it is a fairly big omission, IMHO.
Coupled with them ignoring other huge expenses like the entire cost of the design of the chip, $40 seems kind of high. I wonder if it takes into account the creation, operation and maintenance of the fab facilities. I get the feeling they are simply pricing the cost of raw materials here, and the article is skimpy on details about what exactly IS included.
Take with a healthy dose of salt, I'd say.
Old chips are rather cheap. A quick pricewatch search shows orignal P4s as being $40 and less. Even a fairly modern chip like the P4 2.4ghz based on the prescott core (what runs my computer) is listed at about $120. Please remember that's including Intel's markup to make a profit (the whole point of business) and the markup of the reseller.
However recouping lots of R&D takes a long time. It's not like you've made it back after a couple hundred sales or anything. Also other cousts have to be accounted for, marketing costs, but more importantly operations costs. It simply costs money to have a company.
Really the processor companies are not ripping people off. Perhaps Intel gets away with charging a bit more for their name, but overall AMD keeps them honest. AMD would love for nothing more than Intel to start gouging consumers, because in to that gap AMD would step.
Looking at the production cost and acting like you are getting ripped off is stupid. It's the same as going to a reseraunt and complaining you could make the same meal for less. Sure, if I go to a deceant place I'll pay $25-30 for a nice NY strip dinner with a couple sides and so on. At home, I could do it for $10 probably. However at home, I have to go to the store, get the steak and all the components for the sides, marinade and grill the steak, prepare the sides, then serve and eat. Also, I have to know the recipie to make it good. What I'm paying for at the resteraunt is to have an expert make my food, someone serve me, a nice atmosphere, etc. The materials cost is well less than half, and I'm fine with that.
So you aren't paying for the materials to make your chip, you are paying for the materials, the people who operate the equipment, the equipment itself (extremely expensive) the facalities fo rhte equipment (more expensive), the research, the researchers, the hardware for the researchers, the admins, the testers, the tech support, the management, the advertising, and so on.
when I worked at intel I was told that the per chip cost was $48.00 - this was in '99..
Dude, you're typing this on a computer.
Democrats or Republicans. They are both taking us to the same place and they are not afraid of us anymore.
"We make higher margins on those than the US Treasury does making dollar bills".
The margin on today's chips is nowhere near that high.
Seriously, though the comments about R&D and marketing costs are on track, but leave out an important one: for each new generation of chip, one or more entire fabs (manufacturing lines) need to be built. Lately this costs $2bn (yes, billion) or more. When the next chip process comes along, the whole plant is essentially thrown away (yes, in reality it gets used for down-rev chips, but the lifetime isn't long). The difference between the actual capital deprecitation of these and the real cost/lifetime is another "hidden" component of chip cost. This applies pretty much equally to anyone making cutting-edge chips, including AMD.
One of the reasons AMD stayed so far behind for so long was that its chips, generally a generation behind Intel (in the 1990s) didn't generate enough profit to build these truly leading-edge fabs. The "treadmill" as it was known at Intel, ran too fast for them to catch up. When the market hiccuped in 2000, things changed. Before that was a truly fine time to own lots of Intel stock options.
-- gnet
i'm assuming this isn't limited to pentium 4 chips, but includes all chips that intel makes.
I don't think you fully appreciate the size of Intel, or the sheer number of chips they make...
P4s count for less than 1% of their sales, in terms of volume. CPUs in general almost certainly make up less than 10%.
The vast majority of Intel's output consists of things like opamps, ethernet controllers, simple logic chips, and other trivial (compared to a modern CPU) ICs that mostly cost well under a dollar (to buy, not to make) each.
No, their average cost per chip, over their entire product line, does not come out to $40. Not even close. That would bankrupt them in a week, selling X chips at $600 while selling 95X at $1.
That said, the $40 figure certainly does not take the total cost into consideration. Perhaps the raw materials, electricity, and immediate labor to produce them once everything has fallen into place. But just the cost of building a new fab (in the low billions), or retooling an old one for a new process (hundreds of millions) far outweighs the ongoing per-unit production costs.
Sorry,
They don't make simple logic chips, nor do they make op-amps.
Intel is not in the business of making discreet components.
If you anre interested the Adjusted gross margin of the company (based on previous SEC filings) is roughly 48-52%. That would indicate that a $600 wholesale chip cost the company about $300 to produce, with the other $300 going to expansion, investment in new tech, shareholders dividends, into a bank account for a rainy day, etc.
I would tend to think that most of the profit is mature tech for which the R&D has been ammortized, such as the P3 chips, Xscale, etc.
I have a fairly reliable way of thinking that the P4 division, while a profit center, is not where the big money comes from. Most of that $400-$600 you spend on a CPU is covering other people's costs. (remember retailer markup)
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