How Intel lost the Sony PlayStation deal

Intel ( INTC ) has lost a contract to design and manufacture the PlayStation 6 chip from Sony ( SONY ) in 2022, dealing a significant blow to its effort to build its contract manufacturing business, according to three sources who know the events.

Intel’s effort to win over Advanced Micro Devices (AMD) in a competitive bidding process to supply the design of the future PlayStation 6 chip and Taiwan Semiconductor Manufacturing Co as the contract manufacturer would have amounted to billions of dollars in revenue and would have manufactured thousands. of silicon wafers per month, two sources said.

Intel and AMD were the last two competitors in the bidding process for the contract.

Winning Sony’s PlayStation 6 chip design business would have been a win for Intel’s design segment and would have doubled as a win for the company’s contract manufacturing effort, or foundry business, which has been the centerpiece of Intel’s turnaround plan. Intel CEO Pat Gelsinger.

Gelsinger announced plans for Intel to create a foundry facility in 2021 and officially launched it at an event in San Jose, California, in February of this year. The PlayStation chip deal originated in Intel’s design segment, but would have been a boon to the foundry business’s financial performance after the spin-off this year.

Details of the talks and how Intel missed out on the contract for Sony’s yet-to-be-announced next-generation games console are reported here for the first time.

Sony consoles typically sell over 100 million units in half a decade. For a chip designer, the console business offers less profit than the 50-plus percent gross margins for products like AI chips, but it’s still a steady business that can take advantage of technology a company has already developed. The Sony deal could also have helped boost Intel’s contract manufacturing business, which is now struggling to find big new customers.

A dispute over the profit Intel would make on each chip sold to the Japanese electronics giant blocked Intel from setting the price with Sony, according to two of the sources. Instead, rival AMD won the contract through a competitive bidding process that eliminated others, such as Broadcom, until only Intel and AMD remained.

The talks between Sony and Intel lasted for months in 2022 and included meetings between the two companies’ CEOs, dozens of engineers and executives.

In response to Reuters reporting on the PlayStation 6 talks and Intel’s failure to win the deal, an Intel spokesperson said: “We strongly disagree with this characterization, but will not comment on any conversations with current or potential customers. We have a very healthy client. pipeline in both our product and foundry businesses, and we are directly focused on innovating to meet their needs.”

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

Sony’s current generation of PlayStation consoles are powered by custom chips with a design contract fulfilled by AMD.

Sony announced the PlayStation 5 Pro last week, but has yet to reveal the next generation. Years after its 2020 launch, Sony said it sold 20.8 million first-generation PlayStation 5 systems in fiscal 2023.

Similar to how big tech companies like Google and Amazon rely on outside vendors to help design and manufacture custom AI chips, Sony relies on experienced design contractors to make the processors for the systems.

Console chip designs usually try to ensure backward compatibility in order to allow users to run older games on the new hardware. Switching from AMD, which made the PlayStation 5 chip, to Intel would have risked backwards compatibility, which has been a topic of discussion between Intel and Sony engineers and executives, the sources said.

Ensuring backward compatibility would have been expensive and taken engineering resources. Allowing PlayStation users to play games they purchased for older systems is a feature Sony often includes in a next-generation system.

After missing 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 percent of its workforce to save $10 billion and prepared a plan to cut capital spending for factory expansion, which has been the cornerstone of its foundry strategy.

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. Reuters reported earlier this month on the planned board meeting, citing a source familiar with the board’s discussions.

The potential plans include ideas on how to spin off businesses that Intel can no longer afford to operate, Reuters reported. Executives are also expected to discuss the future of Intel’s Altera programmable chip unit, including a potential sale and expansion of production in Germany.

Intel split its design and manufacturing operations under Gelsinger’s tenure and reported financial results separately starting in the first calendar quarter of this year. In April, the company disclosed a $7 billion operating loss for its manufacturing business.

Intel has struggled to find a major customer to talk about publicly 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 for more than five years, two of the sources said.

Sony’s console business could have pumped about $30 billion into Intel over the course of the deal, according to Intel’s internal projections, two of the sources said. The PlayStation 2 has sold approximately 150 million units since its release in 2000.

A long-term deal with Sony would help attract big new customers for Intel’s manufacturing effort, two sources said, as Intel continues to struggle to attract customers to its advanced 18A process.

(Reporting by Max A. Cherney in San Francisco; Editing by Kenneth Li, Deepa Babington and Leslie Adler)