Intel Explains Billion Dollar Mistake

A costly design flaw in Intel Corporation's support chipset in the Intel 6 Series, Cougar Point, was due to a circuit oversight, the company said.

The chip giant announced this week the Serial-ATA (SATA) ports within the Cougar Point chipsets may degrade over time. This could in turn affect the performance or functionality of SATA-linked devices such as hard disk drives and DVD drives. The chipset will be used in PCs with Intel's latest Second Generation Intel Core processors, also known as Sandy Bridge. Intel unveiled Sandy Bridge at this year's Consumer Electronics Show to much fanfare.

In a press conference, Intel vice president Steve Smith emphasized the chipset flaw was more of an impending product problem that would temporarily halt production; rather than one that affects current products. He said the problem was easily solved. All we need to do is a metal layer change to configure the circuit back to robust operating mode, Smith said.

Temporary or not, the circuit oversight will cost $1 billion. Direct costs are $700 million to adjust the manufacturing process, according to Intel estimates, while reduced revenue will tack on another $300 million. A few mainstream systems with the dual core processors will launched a few weeks later than originally planned.

The company says it will begin to deliver an updated version of the chipset in late February and expects to recover full volume production by April. Intel says it will work with its original equipment manufacturers (OEM) to accept the return of the affected chipsets. It says systems sold to an end customer with the Second Generation Core i5 and Core i7 quad core based systems are among those that could be affected.

Intel insisted this problem would have had a limited impact, but it meant the chips didn't meet the company's quality standards. Smith said the degradation was a statistical issue, and a that a few SATA ports would degrade over a three year period. He said only when the chipset went through rigorous OEM tests, including voltage, temperature and time to failure tests, did any problem occur. Smith said Intel decided last night a response was warranted.

It's been a rapid process until where we are right now, Smith said. Before the systems ended up in consumer's hands, it wasn't meeting our quality standards.

Intel has taken the chipset design as well as a few recently completed transactions, including Infineon Technologies AG Wireless Solutions and McAfee, into consideration for a revised outlook for the upcoming quarter and year-end financials.

First-quarter revenue expectations have now been changed to $11.7 billion, plus or minus $400 million, compared to the previous guidance of $11.5 billion, plus or minus $400 million. Spending is now expected to be approximately $3.6 billion, versus the previous estimate of $3.4 billion. For the year, spending and revenue growth are both revised upwards.

Intel's stock was only slightly affected by the news; while it dropped from the Friday close of $28.22 in early trading it nearly recovered to $28.24 by 12:30.

In the company's last earnings call, Intel had focused on the threat in the mobile space from ARM.