Intel, A Blockbuster Announcement

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Intel lost a contract to design and manufacture the PlayStation 6 chip for Sony in 2022, dealing a major blow to its nascent contract manufacturing business, according to people familiar with the matter.

Intel had struggled to win a competitive bidding process to beat Chaowei Semiconductor for a contract to provide the design for the upcoming PlayStation 6 chip and to work with Taiwan's Semiconductor Manufacturing Corp. as a contract manufacturer, a deal that would bring in billions of dollars in revenue and make thousands of silicon wafers a month, according to people familiar with the matter. Intel and AMD are the final two contenders to bid for the contract.

Winning Sony's PlayStation 6 chip design business will be a win for Intel's design department, as well as a double win for its contract manufacturing business. The contract manufacturing business is one of Intel CEO P·at Gelsinger's core plans to turn the company around.

Gelsinger announced in 2021 that Intel would create a foundry division and officially launched the business at an event in San Jose, California, in February of this year. The PlayStation chip deal originally originated from Intel's design division, but if it is successfully signed, it will greatly benefit the financial performance of its independent foundry business.

This is the first time that details of how Intel missed out on Sony's contract for chips for next-generation game consoles.

Typically, Sony's game consoles sell more than 100 million units in five years. For chip design companies, the profit margin of the game console business is lower than the gross profit margin of more than 50% like AI chips, but it is still a stable business that is able to profit from the technology that the company has developed. Sony's business could also help boost Intel's foundry business, which is currently struggling to find new big customers.

Intel's inability to agree with Sony on a per-chip profit has prevented Intel from reaching a price deal with the Japan electronics giant, according to two people familiar with the matter. Eventually, AMD won the contract through a competitive tender, and in the process, companies like Broadcom were eliminated, leaving only Intel and AMD.

In 2022, discussions between Sony and Intel lasted months, including a meeting between the CEOs of the two companies and the participation of dozens of engineers and executives. In response to Reuters' reports about PlayStation 6 negotiations and Intel's failure to win the business, an Intel spokesperson said: "We strongly disagree with this statement, but will not comment on any current or potential conversations." We have a very healthy customer pipeline in our product and foundry business, and we are fully focused on innovating to meet their needs. "

Sony and Broadcom did not respond to requests for comment, and AMD declined to comment.

One of the few pieces of good news

Intel's foundry or contract manufacturing business has reportedly signed Amazon Web Services as a customer to manufacture customized AI chips, a partnership announced on Monday. The deal provides Intel with confidence support.

Intel's shares rose about 8% in after-hours trading after CEO ·Pat Gelsinger released an internal memo to employees announcing that Intel had identified its Amazon division as a multibillion-dollar customer. The memo also outlines cost-cutting measures planned by Intel.

Amazon's AWS cloud computing division, which has already designed multiple chips for use in its data centers, hired Intel to package at least one version of the chip. Intel will produce an "AI architecture chip" for AWS using its 18A process technology, which is the most advanced version currently available to external customers. The two sides said that Intel is also expected to design more chips based on its future 18AP and 14A process technologies based on Amazon's needs.

The memo also mentions a number of initiatives taken by Intel to restore the company. Last month, Intel reported disastrous second-quarter earnings reports. "The board and I agree that we still have a lot of work to do to improve efficiency, increase profitability and be more competitive in the market," Kissinger wrote in the memo.

Among the steps decided by the board of directors is Intel's plan to sell a portion of its programmable chip business, Altera. In addition, the company said it would suspend construction of a chip factory project in Germany for two years, a move previously reported by Reuters. Intel also plans to suspend its projects in Poland.

Intel said its plans to expand manufacturing in the United States remain unchanged.Intel's plan to keep its manufacturing operations, known as foundry, in-house, confirms earlier reports. The foundry business was crucial to Kissinger's turnaround plan for the company, which he developed in 2021. Before signing the deal with Amazon, Intel had struggled to find iconic customers that could be discussed publicly.

In the memo, however, Kissinger said that the foundry business would gain greater independence, such as being able to accept outside capital. Intel plans to establish it as an independent subsidiary, with an operating board overseeing foundry operations. Earlier this year, the foundry division had separated its financial performance from the design business.

The company will also take a number of steps to prioritize the development of its core CPU technology and is restructuring several divisions, including automotive and "edge" businesses.

On Monday, Intel also said it would receive up to $3 billion in direct funding under the United States CHIPS and Science Act's Secure Enclave program.

The company said it plans to send a layoff notice to about 15,000 employees in mid-October, after announcing the plan in August.

Backward compatibility

The current generation of Sony's PlayStation consoles is designed by AMD with custom chips. Sony announced the PlayStation 5 Pro last week, but has yet to announce the next generation. Since its launch in 2020, Sony said that sales of the first-generation PlayStation 5 system reached 20.8 million units in fiscal 2023. Similar to big tech companies like Google and Amazon, which rely on external suppliers to design and manufacture custom AI chips, Sony also relies on experienced design contractors to manufacture the system's processors.

Game console chip designs are often made sure to be compatible with earlier versions of the system so that users can run older games on new hardware. Switching from AMD, which designs chips for the PlayStation 5, to Intel could pose a risk to backward compatibility, a topic discussed by engineers and executives at Intel and Sony.

Ensuring PlayStation compatibility with earlier versions will be expensive and require a lot of engineering resources. Allowing PlayStation users to play the games they purchased for their older systems on new systems is a feature that Sony often includes in next-generation systems.

Find Iconic customers

Intel missed out on the first wave of AI led by Nvidia and AMD, with Intel reporting disastrous second-quarter results in August. Intel has announced plans to cut 15% of its workforce to save $10 billion and is ready to reduce its capital expenditure plans for factory expansion, which is a cornerstone of its foundry strategy.

The abrupt departure of high-profile board member Lip-Bu Tan also exacerbated the company's challenges. Chen left amid disagreements over Intel's future, and sources said Kissinger and other Intel executives submitted plans to the board last week. Reuters, citing a source familiar with the board's discussions, reported earlier this month that Intel's potential plans include cutting businesses that the company can no longer operate.

Since the first quarter of this year, Intel has spun off its design and manufacturing operations and reported financial results separately. In April, Intel disclosed an operating loss of $7 billion in its manufacturing operations.

Intel has struggled to find an iconic customer to showcase its 18A process technology that is open to other companies. If Intel wins the PlayStation 6 chip contract, it could have plenty of business for its foundry division for more than five years, two people familiar with the matter said.

According to Intel's internal projections, Sony's game console business could generate about $30 billion in revenue for Intel over the term of the contract. Since its launch in 2000, the PlayStation 2 has sold around 150 million units.

The long-term Sony contract could help Intel attract more large customers for its contract manufacturing business, as the company continues to work to attract customers to its advanced 18A process technology, the two people said.

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