Intel's manufacturing cost: $40 per chip

Though Pentium 4s can sell for up to $637, Intel's average cost for making a chip comes to $40, according to a report from analysts In-Stat.

The report doesn't consider expenses related to design or marketing, or the fact that high-end chips can sell for more because fewer off the production line can actually run at top speed, but it does shed light on how Intel has managed to maintain healthy margins in an era of price declines. The cost has been steady at about $40 since 2003, according to In-Stat.

Shrinking chip sizes a la Moore's Law plays a big part. Reducing the size of the chips means more processors can be popped out of a single wafer, thereby increasing the potential revenue without incurring massive additional costs. Intel has also continued to build new factories at a rapid pace, In-Stat noted. The chipmaker has three 90-nanometer fabrication facilities and will have four 65-nanometer facilities by the end of 2006. (The nanometer figures refer to the average feature size on the chips; a nanometer is a billionth of a meter.)

"Intel is one of the few vendors that can continue to push ahead alone and uses its technology and capacity as a competitive strength," Jim McGregor, In-Stat analyst, said in a statement.

Still, major technical challenges loom for everyone in shrinking chips from here on out. Though 65-nanometer chips are slated to come out later this year, companies will have to adopt a number of new technologies, such as metal transistor gates, in the 45-nanometer generation of chips, due out in 2007.

Be careful with numbers

Please be careful about this $40/chip number. What this means is that Intel essentially has to do what the pharmaceutical industry does - pass its R&D costs onto consumers. Speaking for myself, I'm okay with that. But it also speaks to the philosophy behind pricing. You don't price based on how much it costs to make something. You price something based on its value to customers (barring complex ethical issues). But if a great perfume only cost $2.00/bottle to make, but people are willing to pay $75.00/tube, why shouldn't the maker charge that price? This is a debatable philosophy, but generally holds for most markets. It's when we run into ethical issues when it becomes a problem - a la pharmeceuticals. But I'm okay with Intel's practice. They consistently make good processors and I can afford what they charge. If it means they can solve the power consumption issue in the next few years so my laptop will get better battery life, it's worth the added expense. So no big deal.

Common practice

The mega markup is common in the computer world. I see it all
the time. Companies who manufacture parts and software have
a manufacturing cost of near nothing while development is in
the millions and even billions at times.

We have accepted the practice with Intellectual property like
software and media. A CD may drop to an MSRP of $5.99 but
never to the cents it costs to manufacture. Intel however does
have a line of products that have a standard markup above
Manufacturing Costs. Celeron.

Common practice

The mega markup is common in the computer world. I see it all
the time. Companies who manufacture parts and software have
a manufacturing cost of near nothing while development is in
the millions and even billions at times.

We have accepted the practice with Intellectual property like
software and media. A CD may drop to an MSRP of $5.99 but
never to the cents it costs to manufacture. Intel however does
have a line of products that have a standard markup above
Manufacturing Costs. Celeron.

[landlines]

This is like pricing the house from the cost of the paint!!

Yeah, just ignore the huge R&D and marketing cost and concentrate on the cost of polluting a few grains of sand!!!

Since the Fairchild/TI days, the cost of an IC is almost ENTIRELY the amortized R&D and marketing cost per unit.

The whole premise of the article is intellectually vacuous, and shows a complete lack of understanding of the semiconductor industry!!!

[aabcdefghij987654321]

Hollywood's manufacturing cost: $0.5 per movie

As the other comments have said, this is silly.

Intel could sell their chips for the base manufacturing cost, but that would kill the company just like it would kill any movie studio to sell their movies for the cost of stamping DVDs. R&D for both new chips and new manufacturing processes cost a lot of money, not to mention building/upgrading fabs.

I believe Intel has a higher profit margin than what is usual in the turning sand into computrons industry, and like any consumer I would like to see a lower price badge. But that $40 number is not realistic.

[CharlesRovira]

Moore's law doesn't quite apply to pricing

What's being paid for by the clients is the number of component interconnections per cubic centimeter. What it costs intel is in material costs per cubic centimeter, which don't change.

Once they master the techniques of growing material in 3D, around tube structures filled with fluid to carry away heat, look out for intel profit profile.

The actual components and their composition is pretty much irrelevant. This is why you can have FPGAs. Imagine that in 3D.