Can 3D Keep Intel on Top?

intelIntel this week announced a $12 million investment into a visual computing research program focused on using three-dimensional imaging for entertainment, data analysis, medical imaging and scientific research. The Intel Visual Computing Institute is located at Saarland University in Saarbrücken, Germany, and will receive the $12 million over the next five years. The investment is both a nod to the company’s interest in better imaging tools and a path to selling faster, high-margin processors.

Intel is also on the defensive. Its push into 3D is the chip giant’s attempt to find ways to get folks to buy faster, high-margin chips, be they the current generation of Core i7 CPUs or eventually Intel’s Larrabee specialty graphics chip. But it also needs a high-demand chip that can help pad its margins from the success of its low-cost Atom chip.

It can take a lot of computing power to process and display 3D imagery. It also takes a lot of processing power to collect visual data in real time, be it from cameras tracking a person’s movements or merely plucking it from a stream of data and rendering that data as a 3D image. The benefits of visual computing are not limited to better gaming, but can create realistic motion-capture that can be translated to an avatar online, or offer more realistic artificial intelligence that can enable a computer to react to visual cues.

But the key for Intel is the fact that chips used to process such data and to render the graphics are ones with high margins. As video and imagery have become more common, Intel has seen graphics-focused chipmakers such as Nvidia and AMD (which bought GPU maker ATI in 2005) get more attention from mainstream consumers and infringe on its PC market. For example, Apple is now using Nvidia’s graphics chips in its MacBooks after bumping Intel’s integrated graphics last year, and personal tech guru Walt Mossberg has told consumers to consider GPU upgrades rather than x86 upgrades to boost performance on their PCs.

Intel has its own fabs that are able to produce more and more chips every few years, which means the company needs to sell a lot of them. And because it’s making high-end chips for servers, it needs to keep abreast of cutting-edge research and invest continually in the business. In 2008 Intel invested $5.2 billion, or 15 percent of its revenue, in R&D. However, those R&D costs are one of the things that eat away at Intel’s margins, which have shrunk to 45.3 percent in the first quarter of 2009 from 53.8 percent in the first quarter of 2008.

Another drain on Intel’s margins are its low-power Atom processors, which sell for about $250 less than the company’s high-end PC chips. While Intel notes that the Atom chips are high-margin, it looks like they’re also cannibalizing sales of more powerful Intel processors in laptops. The 45-nm Atom costs about $29, compared with $279 for the company’s Penryn Core 2 processor for standard notebook computers, according to Robert Castellano, president of New Tripoli, Pa.-based market research firm The Information Network. He says Intel has had to shift some production of Atom chips to a foundry to keep its margins intact.

But if it can’t count on Atom to fill its fabs, Intel must find other mass-market chips that it can charge dearly for. Graphics may offer that chance, although it’s a more competitive market than Intel is used to.

This article also appeared on BusinessWeek.com.

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