Tuesday 30 June 2015

AMD Doesn't Make $100 for Every Console Sold

[I]f these talks were to result in Microsoft owning AMD, it would save the firm a lot of money. Microsoft, as well as Sony, pay AMD in the range of $100 on each console produced. On top of the savings Microsoft would be making on each console, sales of PlayStation 4 would also directly benefit Microsoft. [nonsense]
Today we are going to unpack what's on display at VG247. This is why you need to pay more than minimum wage for writers to fill your news feeds if you want to get something that provides positive value for readers rather than misleading them with speculation that doesn't stand up to any scrutiny.

These numbers, which we'll go on to show are created by people misinterpreting what is just speculation, smell completely wrong. Any editor who has an understanding of chip sales should have flagged this. $100 is not the important number to look at. Sony has not added ($100 * 22.3m) $2.23bn in profit to AMD's financials in the last 18 months due to per-console fees. Note that AMD's market cap is currently $1.82bn.

ARM, who publicise their offers for IP licensing so you can get a chip design and ask anyone to make it for you (or customise it), charge in the region of 1-2% per wafer. After Microsoft got burned by nVidia on the original xbox, they're highly incentivised to pay a bit up front for R&D and minimise their licensing fees. They want to own the semi-custom design they paid to get developed. Sony have in-house expertise and are unlikely to be taken for a ride by AMD when they've done so many deals with people who generally only make this 1-2% profit on supplying the IP/chip designs.

So where did the number come from?

AMD makes more profit than Sony on the PS4 [...] This sees AMD making quite a healthy profit per console. [nope]
The Inquirer failed to understand a report from the IHS Teardown Analysis service. In this report, IHS estimated that a large (~350mm2) chip like this is likely to cost Sony or MS about $100. This is assuming a good deal from TSMC or GlobalFoundries and very little profit for anyone. So a cost of $100 for a part gets written down as a profit of $100 on that part. This is very stupid but also not the end of the journey. Note that I didn't say AMD was making the SoC.

AMD used to be able to make chips but they spun off that semiconductor fabrication plant operation, following the foundry model. They have completely divested themselves of GlobalFoundries so it doesn't matter who makes the chips, AMD doesn't profit from the actual production being profitable. I'm not sure if some of this analysis is done by people who think that GF is still part of AMD and something MS would be buying.

When MS or Sony pays AMD $100 for a SoC for their console (assuming they can't buy directly from a foundry - something ARM contracts often promote as the normal way of doing business) then AMD need to get a foundry to make the chip and provide it to the console manufacturer. This is not a highly profitable venture as that is not a small chip to make. The IHS estimate of $100 doesn't seem completely off but is an estimate that assumes AMD make virtually no profit, the actual number (or how close this guess is) isn't actually all that important. That 1-2% per-wafer fee sounds not unreasonable. That's cents to a couple of dollars. Not $100.

This would be the profits that MS could save on production of the XBOne and could extract from Sony for production of the PS4. And this is assuming Sony don't have the rights to produce the PS4 SoC paid for in full via their R&D budget and so have to buy SoCs via AMD rather than buying them directly. It's pennies, not almost a third of the current price of the console.

But this isn't to say Microsoft are definitely not interested in AMD. The failure to crush nVidia with their new generation of GPUs (despite having a 6-9 month head-start on nVidia with stacked DRAM) and pinning their hopes at clawing back a competitive x86 part that uses more than 3 Watts being entirely reliant on a 40% IPC increase from Zen means AMD are not in a good space. They're ripe for acquisition. MS have lots of money, especially as AMD are rather small compared to people with similar IP portfolios like nVidia (who Intel is still paying to not develop x86/claim they could if they wanted to - something AMD do have). MS also have that hardware division that does Surface tablets and the xbox consoles. Although they use the best Intel has to offer for an x86 tablet, they could probably move to AMD without ruining the devices. There is some synergy there. It's just not a $100 per console obvious move.

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