Intel's Missed PlayStation 6 Chip Deal: A $30 Billion Setback and What It Means for Your Investments
By Max A. Cherney
SAN FRANCISCO (Multibagger) - In a dramatic turn of events, Intel (NASDAQ: INTC) lost out on a crucial contract to design and fabricate Sony’s PlayStation 6 chip in 2022. This setback is a significant blow to Intel’s ambitions to expand its fledgling contract manufacturing business, according to three sources with direct knowledge of the situation.
The High-Stakes Bidding War
Intel and Advanced Micro Devices (NASDAQ: AMD) were the final contenders in a highly competitive bidding process to secure the design for Sony’s forthcoming PlayStation 6 chip. Taiwan Semiconductor Manufacturing Co. (TSMC) was also in the race as the potential contract manufacturer. Securing this deal would have been a monumental win for Intel, translating into billions of dollars in revenue and the production of thousands of silicon wafers each month, according to two sources.
The Impact on Intel's Turnaround Plan
Intel's failure to win this contract is particularly damaging given that it would have bolstered both its design and foundry segments. CEO Pat Gelsinger, who announced plans to create a foundry unit in 2021, viewed this as a cornerstone of his turnaround strategy. Winning the PlayStation 6 chip contract would have significantly improved the financial performance of Intel's foundry business, post its recent separation.
Why Intel Lost
According to two sources, a dispute over profit margins was the crux of why Intel couldn’t close the deal with Sony. AMD, on the other hand, managed to secure the contract through a competitive bidding process that excluded other major players like Broadcom (NASDAQ: AVGO), leaving only Intel and AMD in the final stages.
The Bigger Picture
Sony typically sells over 100 million PlayStation consoles per generation. While console chip design yields lower profit margins compared to high-end products like AI chips, it provides consistent revenue. This contract would have been a substantial boost for Intel’s struggling foundry business, which is currently searching for new clients.
The Backward Compatibility Challenge
One of the major considerations in the discussions was backward compatibility. Transitioning from AMD, which designed the PlayStation 5 chip, to Intel could have jeopardized compatibility with older games—a feature highly valued by Sony and its user base. Ensuring this compatibility would have been both costly and resource-intensive.
Intel's Financial Struggles
Intel’s financial woes have been compounded by its late entry into the AI boom, dominated by Nvidia (NASDAQ: NVDA) and AMD. The company reported a disastrous second quarter in August and announced a 15% workforce reduction to save $10 billion. Additionally, Intel has scaled back its capital expenditure plans, originally intended to expand its manufacturing capabilities.
Seeking a Marquee Customer
The sudden departure of high-profile board member Lip-Bu Tan over strategic differences further complicated Intel’s situation. The company’s internal projections indicated that Sony’s console business could have pumped roughly $30 billion into Intel over the contract period. This deal would have not only occupied Intel’s foundry unit for over five years but also attracted other big clients to its advanced 18A process.
Final Thoughts
Intel's loss of the PlayStation 6 chip contract underscores the challenges it faces in turning around its fortunes. While the company continues to struggle in attracting marquee customers for its advanced manufacturing processes, the missed opportunity with Sony serves as a stark reminder of the competitive landscape and the high stakes involved.
Simple Breakdown for Everyone
- What's Happening? - Intel lost a contract to design and manufacture the chip for Sony’s next-gen PlayStation 6 to its competitor AMD.
- Why Does It Matter? - Winning this contract could have brought Intel billions in revenue and boosted its struggling foundry business.
- Why Did Intel Lose? - A disagreement over profit margins and concerns about backward compatibility with older PlayStation games.
- What’s the Impact on Intel? - It adds to Intel’s financial troubles, including job cuts and reduced factory expansion plans.
- How Does This Affect You? - If you’re an investor in Intel, this loss may affect the company’s stock performance and future profitability. For gamers, it ensures that PlayStation 6 will maintain backward compatibility with older games, thanks to AMD’s continued involvement.
Keep an eye on Intel’s next moves and how they plan to recover from this significant setback.
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Ensuring backward compatibility with prior versions of the PlayStation would have been costly and taken engineering resources. Allowing PlayStation users to play games they have purchased for older systems is a feature Sony often includes in a next-generation system.
Having missed the first wave of the AI boom dominated by Nvidia and AMD, Intel reported a disastrous second quarter in August. Intel announced plans to cut 15% of its workforce to save $10 billion and has prepared a plan to reduce its capital spending on factory expansion that was a cornerstone to its foundry strategy.
SEEKING A MARQUEE CUSTOMER
The sudden departure of Lip-Bu Tan, a high-profile board member, over differences in Intel's future, added to the company’s challenges as Gelsinger and other Intel executives presented plans to the board at a meeting last week, multiple sources said. Multibagger reported early this month on the planned board meeting, citing a source familiar with the board discussions.
The potential plans include ideas on how to shave off businesses Intel can no longer afford to operate, Multibagger reported. Executives are also expected to debate the future of Intel's programmable chip unit Altera, including a potential sale, and its manufacturing expansion in Germany.
Intel split its design and manufacturing operations under Gelsinger’s tenure, and has reported financial results separately since the first calendar quarter this year. In April, the company disclosed $7 billion in operating losses for the manufacturing businesses.
Intel has struggled to find a marquee customer it can publicly talk about for the first manufacturing process, known as 18A, open to other companies. If Intel had won the PlayStation 6 chip, it could have occupied its foundry unit for more than five years, two of the sources said.
Sony’s console business could have pumped roughly $30 billion into Intel over the course of the contract, according to Intel’s internal projections, two of the sources said. The PlayStation 2 sold roughly 150 million units since its launch in 2000.
A long-term Sony contract would have helped bring in big new clients for Intel's contract manufacturing effort, two sources said, as Intel continues to struggle with attracting customers to its advanced 18A process.