The Microsoft-Intel alliance, which long dominated the PC era, is continuing to see its influence wane with the rise of smartphones and tablets, and the pressure to gain ground in the mobile device market is causing fractures in the once tight partnership, according to analysts.
Hundreds of millions of PCs will continue to be sold every year, but it's smartphones and tablets that will see significant growth in the future, and the bulk of those devices are powered by chips designed by ARM Holdings and run primarily on Apple's iOS and Google's Android operating systems.
Intel and Microsoft are taking aggressive steps to muscle their way into the mobile device market, but still find themselves behind the curve, according to analysts with IHS iSuppli. And their efforts are forcing them to move away from the formidable Wintel alliances, with Intel looking for Android-based device makers to embrace its low-power Atom platform and Microsoft readying an operating system that can run on ARM-powered devices.
"Microsoft and Intel once marched shoulder-to-shoulder, dominating the PC market with their closely tied operating system and microprocessor technologies," Craig Stice, senior principal analyst compute platforms at IHS, said in a Sept. 4 statement. "While still an overwhelming influence in their respective markets, the tables have turned for Microsoft and Intel. With smartphones and tablets performing tasks previously exclusive to PCs, the computer market has expanded to include other platforms. As a result, Wintel finds itself in the unfamiliar position of dancing to someone else's tune, following standards that were set by other companies for form factors, user interfaces and even pricing. This means Microsoft and Intel must think outside the box-even if it means adopting strategies that work against each other's interests."
At the same time, Piper Jaffray analyst Gus Richard said in a Sept. 4 research note that the trend toward non-Wintel devices-particularly ARM-based smartphones and tablets from such vendors as Amazon, Apple, Android system makers and even Microsoft, with its Surface tablet-will prove more popular during the holiday season this year than traditional PCs, fueling the drive toward what he and others call the "post-PC era."
Pricing will be a key issue, according to Richard. Ultrabooks-a new Intel-based notebook model-are expected to drop in price to almost $600, while such ARM-based products like Amazon's Kindle Fire, Microsoft's Surface and Apple's iPad Mini will be in the $199 to $299 range.
In our view, a $199 tablet that runs Microsoft Office is going to be a very compelling alternative to an Ultrabook or regular notebook," he said. "We believe without the Wintel hegemony, Intel either has to lower prices aggressively and/or face steadily declining revenue as the notebook market shrinks over the next couple of years."
IHS' Stice already is predicting continued market share declines for both Intel and Microsoft. He said that in what he called the "new" computer market-which includes PCs, smartphones and tablets-Microsoft will see its share of the OS space drop from 44 percent in 2011 to 33 percent by 2016. Meanwhile, Intel's share of processors in the new computer market will fall from 41 percent to 29 percent during the same period.
Meanwhile, the actual size of the market will continue to expand, doubling between 2011 and 2016, fueled by smartphones and tablets, according to IHS. The firm is forecasting that 655 million smartphones-triple the number of mobile PCs-will ship this year, and that by 2016, 311 million tablets will ship, almost equal to the 322 million mobile PCs.
Piper Jaffray's Richard is even more aggressive in his projections. Tablets will out-ship notebooks by the second half of next year, with notebook shipments falling 2 percent this year and another 8 percent in 2013, due to rapid growth in the number of low-cost ARM-based tablets. Ultrabooks won't help Intel much, he wrote.
"We think this conversion is driven by the availability of Microsoft Office on ARM and the inherently lower cost and margin of the Surface CPU," Richard wrote. "We think at this point there is little Intel can do to protect its legacy notebook business."
IHS' Stice said Intel and Microsoft are being forced to play catch-up in a rapidly evolving market.
"Wintel now is playing in a new computer market that is a composite of the PC, smartphone and media tablet segments," Stice said. "While this may be a nontraditional way of looking at the PC market, tradition has gone out the window.
"The smartphone influenced the tablet, the tablet influenced the PC, the PC wants to become more like a tablet and the tablet more like a PC. It's a vicious circle in which both Intel and Microsoft must take part, but they are losing control of the game and how it's played," he continued.
Stice noted a "schism" that is forming between Intel and Microsoft as each tries to penetrate the smartphone and tablet markets, with each company moving toward partnerships with other players. Intel not only is pushing Ultrabooks, but also is using its Atom processors to court vendors that make Android tablets. It's part of a larger drive toward a more OS-agnostic approach, according to IHS.
Meanwhile, Microsoft has reconfigured its Windows OS for tablets in the upcoming Windows 8, which is due to be released next month. At the same time, a version of the operating system-dubbed Windows RT-is optimized for ARM-based systems, a move by Microsoft to become more platform-agnostic.
Microsoft also is partnering with Nokia in the smartphone space with its Windows Phone OS.