Intel Benefits From Microsoft's Aggressive Contra Revenue Campaign

Jun.30.14 | About: Intel Corporation (INTC)

Summary

Microsoft is aggressively pushing the Surface 3. It is offering up to $650 trade-in value to MacBook Air owners for them to defect to the Surface 3.

Intel will sell more high-margin Core i3 – Core i7 processors with Microsoft’s antagonistic attack on Apple and Apple might be forced to lower the price of the MacBook Air.

Microsoft’s willingness to use contra revenue will likely expand to other products. Price wars or contra revenue tactics ultimately benefits Intel.

Here is one more reason why Intel (NASDAQ:INTC) bulls should keep the stock running above $30. Microsoft (NASDAQ:MSFT) is implementing an aggressive contra revenue tactic to lure customers to the Surface 3. Microsoft is offering iLoyalists up to $650 in trade-in value to swap their MacBook Air laptops for the Surface 3.

The offer is only valid for Mac loyalists who visit Microsoft Stores in the U.S. and Canada. This promotion is good until July 31. Microsoft is showing just how willing it is to outdo Intel in terms of using contra revenue to make its hardware products steal customers away from Apple (NASDAQ:AAPL).

Microsoft can easily afford to even make this trade-in program a permanent promotion. It rakes in a good money from Office for iPad subscriptions and Android licensing fees. Microsoft can also recoup some of the contra revenue by dumping the swapped MacBook Airs in emerging markets. People in Asia and Africa will gladly buy used MacBooks at a premium over new Wintel notebooks.

Intel's Double Bonanza

Intel and its investors benefit from increased sales of the Surface 3. Inside the Microsoft tablet hybrid are high-priced Core iSeries chips not low-margin Atom processors. Microsoft's trade-in program will find some takers among MacBook Air owners. The concept will still help Intel ship out more processors (sold at above cost) to Microsoft's Surface 3 campaign.

Furthermore, there's a chance that Apple will retaliate against Microsoft's predatory tactic and lower the price tags of current MacBook Air models to keep its customers loyal. Apple can also offer a trade-in program for its iLoyalists to swap their old Intel-powered MacBooks for new models. Whatever happens, a price war/trade-in war that increases sales of Mac OS and Windows 8.1 premium products ultimately benefits Intel.

Microsoft Can Also Use The Same Tactic Against iPads

There's no reason why Microsoft should only attack MacBook Air. The company can also offer iPad owners the same kind of deal. Apple customers can perhaps be tempted with a $300 trade-in value to swap their Apple tablets to the Surface 3. There are far more iPad users that Microsoft can entice to defect.

Microsoft will spend more on contra revenue if it attacks the iPad but that company's strong enterprise business can replenish the expense of this plan. The point is that Microsoft's willingness and fat war chest for contra revenue-fueled warfare helps Intel sell more higher-margin x86 processors.

It is sad that there is still no Intel-powered Windows smartphones. I suspect that Nadella may even use the same aggressive tactic to lure iPhone users to swap their phones for Windows Phone handsets. The iPhone has even more users who can be persuaded to defect with fat trade-in offers.

Conclusion

Intel needs to sell more higher-margin processors. Microsoft's readiness to use contra revenue for the Surface 3 helps Intel. It will be great if Microsoft will also provide contra revenue on more Intel-powered Windows 8.1 tablets.

Microsoft should help Intel shoulder some of the $3 billion/year operating losses on mobile chips. Instead of Intel solely providing contra revenue to OEM tablet firms, Microsoft can contribute some persuasion money too.

INTC is a Strong Buy. Intel has outperformed Apple and Microsoft this year. More investors are now realizing Intel's Suez Canal-like position among competing tech companies. Both Apple and Microsoft use Intel chips in their competing products. Price wars or contra revenue tactics among Intel clients can spur sales of higher-margin x86 processors.

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Source: Google Finance

INTC is still attractive despite it now having a trailing P/E that's higher than 15. The Intel bulls are just aggressively betting that strong Q2 PC sales will deliver great numbers for the next earnings report.

Disclosure: The author is long INTC, AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.