So you do all the lithography, and vapor deposits on a wafer. That wafer has ~100 physical processors on it (100 just to make rounding easier). You split them (into individual chips), and you start testing.
Say on ~10 Hyper Threading, all the cache cells, and all the magic virtualization stuff works. These become some pro-sumer Xeon type deal.
On another ~10 Hyper Thread, and all cache cells works. This is your i9's
On another ~30 no Hyper Threading, and only some cache cells works. This is your i7's
The rest there is no Hyper Threading, only some cache cells work, and wow only 4 physical cores work. This is your i5's and i3's (kind of).
The idea is yeah, whole parts of a CPU are defective, or unperforming. So they just get disabled and "binned" as another lower tier CPU of the same micro-architecture. All of these get solid at >100-5000x markup to offset the $50bil+ in R&D Intel spends each year. Yes their margins, are... amazing.
Also, the reality is that the consumer market is a massive beneficiary of this whole scheme. The server market is effectively subsidizing consumer processors to the tune of billions, if consumers had to pay full freight on their dies prices would be several times higher than they are.
if consumers had to pay full freight on their dies prices
would be several times higher than they are.
The fundamental processes of producing an equal die space SoC as a Xeon on the same (node) is likely roughly equal cost (or I imagine the fabs as a service would go out of business). So saying Intel -needs- the consumer market to subsidize their server line is a total lie.
Intel puts an extreme markup on their server class processors, and a milder mark up on the consumer segment