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By | Joe Fay 30th May 2011 11:00

Think PCs will drop in price? Think again, warns Intel

Selling chips better biz than selling drugs

The Golden Age of ever-decreasing PC prices is over, at least as far as Intel is concerned.

Speaking to investors in London last week, the chip giant's CFO Stacy Smith boasted how the vendor had broken the pricing death spiral that has bedevilled the PC industry for most of its history.

This has been achieved by a combination of technology and manufacturing innovation, matched by a much tighter branding and segmentation strategy, he claimed.

In his presentation, he said that ASPs in the vendor's PC Client business had gone up six points since 2009, adding "this is very significant".

It would certainly be significant to anyone who watched the PC industry through the '90s and into the last decade will remember how the chip industry worked. In the chip part of the industry, a vendor (mainly Intel) would launch a product, which would attract its premium price point.

Last year's premium chip would be pushed down the price list, as would everything else in its turn, with that hot chip from a couple of years back being bumped off the main price list and into Intel's embedded business. And that price list itself would be a sprawling jumble of brand names, prefixes, suffixes and clock speeds.

In the last few years, Smith claimed, the vendors' marketing teams had "done a great great job of cleaning up our brands".

And rather than just "waterfalling" its latest feature right down through its range, it has become much more discrete.

"As a company, we're putting significant features into different parts of the market... we're making sure we get paid for it."

The vendor is also holding the line on server products. The explosion of cloud and mobile services, and the datacentres behind them, are underpinning massive margins in its server chips business.

Smith said that there was a simple equation behind this. The benefits Intel reckons it can deliver to server operators – plus that more sophisticated segmentation and the fact that Intel's take is just 2 per cent of data centre spending – means it can justify the prices that to the untrained eye will seem quite eyewatering.

"In this business you get paid for that investment," said Smith.

Paid to the tune of $8.7bn last year, generating operating margin of $4.4bn, or 50.5 per cent. The PC client group, by comparison, makes a margin of 43 per cent on its much bigger revenue of $30.3bn.

Indeed, Smith told investors: "There's not too many businesses where you could get that margin... selling drugs maybe."

An Intel spokesman assured us the Smith was, of course, referring to the legal pharmaceutical industry, and had not used case studies on the likes of Pablo Escobar and Howard Marks when constructing his financial model for Intel.

Either way, there's just not the downward pressure on server prices you might have seen back, say, in the years after the dot com bust.

That doesn't necessarily mean higher PC prices – vendors could always shred their own margins or drive down costs somewhere else in the supply chain. But today's much more consolidated PC industry doesn't seem inclined to slash its own throat. Not too deeply anyway.

Back in March, Acer's Walter Deppeler warned that a firmer dollar was putting a floor under prices, while a more continent supply chain and industry consolidation was checking declining PC prices. PC ASPs were set to rise this year, said Deppeler.

Falling prices have always seemed like a fact of life in the tech industry. So, Intel is clearly feeling it's different this time.

All it needs to do now to keep things in balance is to not unleash an Itanium-like turkey into its product line, achieve its ambitions of entering the burgeoning phone market, and not be blindsided by an upstart competitor sneaking into one of its core markets. And be sure that its surging business is not, in part, down to any kind of bubble among technology buyers. How hard can that be? ®

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