Exclusive – How Intel Lost Sony's PlayStation Business

Intel has lost a contract to develop and manufacture Sony’s PlayStation 6 chip in 2022. That was a major blow to Intel’s efforts to build out its nascent contract manufacturing business, according to three people familiar with the proceedings.

Intel’s efforts to outbid Advanced Micro Devices in the bidding process to provide the design for the upcoming PlayStation 6 chip and bring on Taiwan Semiconductor Manufacturing Co. as a contract manufacturer will result in billions of dollars in revenue and thousands of silicon chips produced each month, according to two sources.

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

Winning the design of Sony's PlayStation 6 chip was a win for Intel's design division while also being a win for the company's foundry business, which has been the centerpiece of Intel CEO Pat Gelsinger's turnaround plan.

Gelsinger announced that Intel plans to launch a foundry unit in 2021 and officially unveiled it at an event in San Jose, California, in February of this year. The PlayStation chip deal originally came from Intel’s design division, but it has been a boon to the financial performance of the foundry business after its split this year.

Details of the talks and how Intel missed out on the contract for Sony's yet-to-be-announced next-gen gaming console are available here for the first time.

Typically, Sony’s consoles sell more than 100 million units in half a decade. For a chip designer, the console business generates less profit than the 50%-plus gross margins of products like AI chips, but it’s still a stable business that can leverage technology the company has already developed. The Sony deal may also have helped boost Intel’s contract manufacturing business, which is currently struggling to find major new customers.

A disagreement over how much profit Intel should get from each chip sold to the Japanese electronics giant prevented a deal with Sony, two of the people said. Instead, rival AMD won the contract through a competitive bidding process that eliminated other companies such as Broadcom until just Intel and AMD remained.

Talks between Sony and Intel continued for months in 2022 and included meetings between the companies' executives and dozens of engineers and executives.

In response to Reuters' reports about the PlayStation 6 talks and Intel's failure to win the deal, an Intel spokesperson said: “We disagree with this characterization but will not comment on current or potential customer discussions. We have a very healthy customer pipeline, both in our product and foundry businesses, and we are fully focused on innovating to meet their needs.

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

Backward compatibility

Sony's current generation of PlayStation consoles are powered by custom chips that AMD has a design deal for.

Sony announced the PlayStation 5 Pro last week, but it hasn’t revealed the next generation yet. Years after its 2020 launch, Sony announced that it sold 20.8 million first-generation PlayStation 5 units in fiscal 2023.

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

Development of the console chip typically tries to ensure backward compatibility so users can play older games on new hardware. The sources said the switch from AMD, which made the PlayStation 5 chip, to Intel would have jeopardized backward compatibility, a topic of discussion among engineers and executives at Intel and Sony.

Ensuring backward compatibility with previous versions of PlayStation was expensive and required technical resources. The ability for PlayStation users to play games they purchased for older systems is one of the features that Sony often incorporates into its next-generation system.

After missing the first wave of the AI ​​boom dominated by Nvidia and AMD, Intel reported disastrous second-quarter results in August. Intel said it would cut 15% of its workforce to save $10 billion and laid out a plan to scale back its investment in expanding factories that had been a cornerstone of its foundry strategy.

I am looking for a big client

The sudden departure of Lip-Bu Tan, a senior board member, over disagreements over Intel’s future has added to the company’s challenges, with Gelsinger and other Intel executives presenting their plans to the board at a meeting last week, according to multiple sources. Reuters reported on the board meeting scheduled for earlier this month, citing a source familiar with the board’s discussions.

Reuters reported that potential plans include divestments from divisions that Intel can no longer afford. Executives are also expected to discuss the future of Intel’s Altera programmable chip unit, including a potential sale and expanded production in Germany.

Under Gelsinger, Intel has separated its design and manufacturing businesses and reported financial results separately since the first calendar quarter of this year. In April, the company reported a $7 billion operating loss for its manufacturing divisions.

Intel has struggled to find a major customer to talk about publicly for its first manufacturing process, known as 18A, which is also open to other companies. If Intel had won the PlayStation 6 chip, it could have kept its foundry busy for more than five years, two of the people said.

Sony’s console business could earn Intel about $30 billion over the life of the deal, according to two of the people, citing internal Intel projections. About 150 million PlayStation 2 units have been sold since its launch in 2000.

The two sources said a long-term deal with Sony would have helped attract major new customers to Intel's contract manufacturing operations, as Intel continues to struggle to win customers for its advanced 18A process.