Why Intel Corporation Added This Feature to Cheap Desktop Chips

By Ashraf Eassa Markets Fool.com

Earlier this month, microprocessor giant Intel (NASDAQ: INTC) released a whole slew of chips as part of its seventh-generation Core processor family.

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The chipmaker had previously released a handful of seventh-generation Core processors aimed at ultra-low power laptops late last year, but waited until early January of this year to roll out chips appropriate for a broader range of personal computers, including desktop computers.

Image source: Intel.

Intel's desktop personal computer lineup consists of chips sold under the Celeron, Pentium, Core i3, Core i5, and Core i7 brands, in order of pricing, performance, and features.

Intel's Pentium and Celeron desktop processors are not branded as "Core" but are, at least for desktop computer-oriented products, based on de-featured variants of its workhorse Core processor designs.

As part of the de-featuring, Intel would reduce frequencies (higher is better), disable portions of the graphics processors (making them less capable of handling 3D graphics workloads, like video games), and even turn off features fundamental to the processor cores.

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One such feature is called hyper-threading (HT), Intel's marketing term for a feature more generally known as simultaneous multithreading (SMT). This allows a processor core's resources to be better utilized in some cases, as HT makes each processor core appear to software as multiple processor cores (two, in the case of Intel's chip designs).

Image source: Intel.

This is a feature that helps speed up applications that can take advantage of multiple processor cores, and can also aid in allowing systems to better handle several tasks concurrently.

In its desktop processor product line, Intel had traditionally reserved HT for its dual-core Core i3 processors as well as its quad-core Core i7 processors, disabling the feature in its mid-range Core i5 and low-end Celeron and Pentium processors.

However, as PC World's Gorgon Mah Ung points out, Intel's seventh-generation Pentium processors now include this feature.

Let's take a closer look at the potential business reasons why Intel is finally bringing this feature to those lower-cost chips.

An easy, margin-neutral way to boost performance

Hyperthreading is a technology that's fundamentally built into all of Intel's Core architecture based processors; Intel's marketing department simply chooses to disable it in certain models for market segmentation reasons.

Image source: Intel.

This means that chips with the technology enabled don't carry a fundamentally higher cost structure than ones that don't.

The idea behind Intel's market segmentation practices is simple: It wants to give customers incentives to purchase higher-end products by reserving features and functionality for higher-end chips to keep its average selling prices as high as possible.

At the same time, though, Intel needs to be sure that it delivers additional performance at established price points each year so that computer makers can offer faster computers without raising prices on consumers.

Intel enabling Hyperthreading on the lower-end Pentium chips is a way for the company to increase performance on these chips without ballooning its cost structure, which could translate into either price hikes or gross profit margin reductions.

It also serves to further differentiate the company's Pentium offerings from the even lower-end Celeron processors, which still -- per Intel's ARK product page -- come with HT disabled.

The catch

PC World sought industry analyst Kevin Krewell's input on Intel's move here, and he brought up a good point (his analysis is paraphrased by PC World):

One issue for Intel, Tirias Research analyst Kevin Krewell noted, is the lack of air between its pricier Core i3 and Pentiums. For example, the dual-core 3.9GHz Core i3-7100 costs $117 in volume and has Hyper-Threading and graphics. The dual-core 3.7GHz Pentium G4620 costs $86 to $93, has Hyper-Threading and HD 630 graphics. For that roughly 25% increase in price, all the customer gets is about a 5-percent performance boost.

While it may be the case that the lower price-to-performance ratio of the lowest end Core i3 relative to the Pentium G4620 could impact the appeal of the i3 chip to those who buy chips directly to build/upgrade their own computers, most chips are sold as part of pre-assembled personal computers.

Typical consumers probably don't know (or care) about these "speeds and feeds," and thus may find value in picking Core i3-based systems for a couple of reasons:

  1. System vendors tend to bundle better system components around faster processors, so even if a customer might not necessarily think the extra processor performance is worth it, the Core i3 systems are likely to offer better features elsewhere; and
  2. Intel has done a good job of establishing that its Core brand is a premium one relative to Pentium/Celeron (which have been relegated to budget personal computers for a while). This means that a customer who isn't paying attention to the speeds and feeds may believe that even the lowest-end Core i3 processor will deliver a significantly better user experience than the best Pentium processors.

What investors should watch

Intel typically reports the changes in both unit shipments and average selling prices of its notebook and desktop processors separately in each quarter on year-to-date, year-over-year, and sequential bases.

Investors interested in seeing if Intel's new strategy has a significant impact on product mix should pay attention to the changes that Intel reports in its desktop platform average selling prices in the coming quarters.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.