Intel Tries To Shore Up Its Future By Chaining Its Chips

Last Updated Sep 22, 2010 8:11 AM EDT

Intel (INTC) has a new strategy: charge customers for extra features. It might sound like the sort of marketing tactic that companies often experiment with, and it offers some significant business advantages, but the issue is far more complex.

The move already has some influential blogs screaming foul, so keeping the change may be difficult. However, the simple adoption of the approach is telling about the industry and Intel's strategy, and not in a good way.

According to the Engadget story, an Intel upgrade card for the Pentium G6951 has appeared on Best Buy (BSY) shelves:

An eagle-eyed Engadget reader was surfing the Best Buy shelves when he noticed this $50 card -- and sure enough, Intel websites confirm -- that lets you download software to unlock extra threads and cache on the new Pentium G6951 processor. Hardware.info got their hands on an early sample of the chip and discovered it's actually a full 1MB of L3 cache that's enabled plus HyperThreading support, which translates to a modest but noticeable upgrade.
In other words, Intel wants to move into the hardware equivalent of what software companies have been able to do for years: Sell an initial product with hidden capabilities and then let consumers buy an upgrade without having to deliver anything more than an unlocking code.

Such a strategy offers a number of advantages:

  • Manufacturers only make one variant, simplifying production, maintenance, and testing.
  • Fewer physical versions means less complicated inventory, which saves time and money for manufacturers and retailers.
  • The more complex version doesn't cost significantly more to make than a single variant, so there is no financial penalty.
  • There's the chance of increased margin from some portion of customers.
  • A try-before-you-upgrade capability can provide cheap and effective marketing.
  • If a product went through retail, it's a chance to capture user contact information and begin developing a direct relationship with customers. In fact, a company could provide some freebie that required registration to capture data from a larger group of customers than only those willing to pay an additional amount.
The tactic becomes more tempting for a hardware company like Intel. It sells a component that is integrated into other products, so is even further away from consumers than a typical high tech company. Fewer variations could mean significantly less inventory, freeing capital for other uses. Consumers could buy one chip and then upgrade it without having to swap components, and most would never have considered the possibility of improving machine speed with a change in CPU. In theory, the company could offer a trial, during which the consumer might have a couple of weeks to see how the performance is with the added capability and then to either pay to keep it or let it go dormant once again.

The signs of negative reaction quickly started. I'll write more about that later this week, because at the hub of the quickly forming backlash is an interesting cultural dynamic that will increasingly cause problems for consumers and companies in all industries. Today, let's consider what Intel's move shows about the company and the industry.

Despite some positive-sounding numbers this year from Intel, as well as HP (HPQ) and Dell (DELL), the PC and server industry faces serious difficulties. Consumers continue to want more for less. Even Apple (AAPL) has seen declining average sales prices over a few years now. The PC industry? Forget it.

Real income for the vast majority of consumers has steadily declined for a long time. There's too much debt and too little free cash. In addition, people have become conditioned to technology always falling in price and increasing in power.

Not only are consumers restrained in their buying, but corporations have been careful. Capital expense budgets went through the floor in 2008 and 2009 as companies put off necessary purchases in the face of the recession. They did some major purchasing in the first half of the year, but that wasn't going to last forever. Intel has already reduced its third quarter outlook as corporations had a buying spree to replace aging desktops and servers.

Chip upgrades are an attempt to improve margins and get direct relations with consumers. Suddenly individual buyers become direct customers. Not only is there more money, but system manufacturers wouldn't need a cut (though Intel might pass some revenue along to get vendors to promote the program), so the actual margin dollars going back to Intel could be as high as $25 to $35 a person.

However, it's a stopgap tactic at best. Most people are unlikely to upgrade and have come to expect everything they need in the PCs they buy. Those that do choose the upgrade might do so to put off purchasing a new PC, which in the long run means less money for vendors and for Intel, which would presumably sell chips, and not necessarily just CPUs, for the new systems. This is another sign of desperation in the face of a world that has changed too quickly. No one knows what consumers will want, which products will work, and what strategies will preserve their earnings.

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Chain image: RGBStock.com user Abyla. Chip image: Courtesy, Intel. Photo editing: Erik Sherman.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.