The Wintel duopoly of Microsoft (MSFT) and Intel (INTC) has been severely hurt by Apple's game changing iPhone and iPad. These companies which have dominated the consumer and enterprise technology industry for the last 2 decades have seen the first serious assault on their supremacy. The Wintel Empire had a vice like grip on the computing industry, with Intel providing the hardware (chips) while Microsoft provided the software (Windows). Though there were competitors like Advanced Micro Devices (AMD), RedHat (RHT) etc. these companies posed no serious threat to the Wintel Empire. However, Apple changed everything, first with the introduction of the iPhone and then with the iPad. The iPhone and iPad decisively moved the computing industry focus from PCs and laptops to mobile devices. Google (GOOG) in its own way also struck important blows to the empire through Android, Google Office Apps etc.
Stock Prices reflect the changes in the pecking order
While the smaller players of the Wintel Empire like Dell (DELL) and HP (HPQ) are fighting to survive, MSFT and Intel have seen their stock prices stuck in a rut. In comparison, the leaders of the mobile market such as Apple (AAPL), Qualcomm (QCOM) and Google have seen their stock prices go up and have overtaken Wintel players in market capitalization.
Secular decline in the PC Market is the biggest issue for the Empire
PC sales have declined for the first time in 11 years in 2012 due to the growing popularity of tablets powered by Google/Apple software. Though Wintel is still dominant in the server space, the PC decline is a big problem for these companies as the majority of their revenue comes from this segment. Both companies have realized that they face an existential threat if they don't move into the mobile computing space. In 2013 tablets are expected to grow by ~67%, smartphones by ~28% while PCs/laptops will remain flat at best. Tablet shipments will surpass PC shipments in the next few years which will further pressure the Wintel players.
What has Intel done till now
Intel top management has acknowledged that they missed on the mobile devices trend and are pulling out all stops to catch up with competitors like Qualcomm, ARMH and Nvidia (NVDA). I think that it is only a matter of time before Intel catches up with competitors in the mobile processor segment. The company generates a huge amount of cash flow each year with gross margins in excess of 60%. The company is using its massive resources to capture a big market share in the smartphone and tablet processor space. Intel is concentrating R&D to build processors which consume lower amount of power - a necessity for the mobile processor industry. The company has already managed to win some big customers for its processors.
Intel announced the launch of its new SOC hardware platform in the recently held Mobile World Congress in Barcelona. According to Intel, the Atom Z25xx platform ("CloverTrail+") has double the processing power and triple the graphic capabilities compared to its preceding Atom 24XX platform ("Medfield"). This new lineup of 32-nm dual-core SoCs includes the 1.2-GHz Atom Z2520, 1.6-GHz Atom Z2560 and 2-GHz Atom Z2580. Intel's partners have already launched/announced new smartphones based on the new platform.
What has Microsoft done till now
Microsoft has introduced both hardware and software products for the mobile industry. The company has launched Windows tablets based on both ARM and Intel processors. The company has also made its Windows 8 much more mobile friendly with a totally new interface (Live Tiles). The company has also partnered with the world's second largest mobile seller Nokia (NOK), so that Nokia smartphones will only use Windows operating system. PC vendors like Acer, Lenovo etc. have also introduced new products like the PC-tablet hybrids which makes use of the new Windows 8 operating system.
Why Microsoft and Intel have failed in their initial mobile efforts
Both Intel's and Microsoft's efforts till now in the tablet and smartphone industry have failed. The reason is that both the companies are testing the waters with what works and what does not. Intel still does not have a communication chip in its mobile SoC, while MSFT operating system is still not optimized for tablets and smartphones. Nvidia CEO cited the absence of key MSFT software such as Outlook as one of the reasons for the low sales of the Surface RT product. Intel's "Clovertrail" range of chips is also not as good as Qualcomm Snapdragon range of processors.
What are Microsoft and Intel doing to strike back
Intel is going to introduce a new range of mobile chips made from its leading edge 22 nm fabs by the end of the year. Intel's current crop of mobile chips is built using 32nm technology, and by shrinking them down to 22nm, the "Merrifield" chips would become the smallest of their type in the world. They will have twice the processor power at the same energy levels and Intel should have a mobile SoC product with integrated communication capabilities.
Microsoft is also making radical decisions with its Windows operating system. The company's new Windows Blue operating system will integrate the PC and mobile versions and will be much more mobile friendly. Big PC and laptop vendors such as Dell, HP, Acer, Asustek and Lenovo are coming out with new products such as tablets, PC-tablet hybrids and smartphones based on the Windows platform.
Stock Performance has been bad providing a great opportunity for investors
In the past 5 years, both Microsoft and Intel have underperformed other technology companies in stock returns. Their current valuations are depressed with a P/E at just ~10x, while other Wintel companies like Dell and HP have even lower valuations. The decline in PC sales has been the single biggest reason for their poor performance. However as the Wintel empire increases its mobile market share through new products, the stock prices and valuation should increase. Microsoft and Intel are still very powerful companies earning billions of dollars in OCF each quarter.
Both Microsoft and Intel have been caught napping by the paradigm change in the technology industry in favor of mobile devices. These companies are now shifting their massive resources to capture an increasing share of this fast growing segment in the overall computing market. Both companies have the technology and ability to become market leaders in the smartphone and tablet market. While their first products have not set the market on fire, both the companies are in the mobile game for the long run. They will keep improving their offerings and will become a big player if not the No.1 player in the mobile market. I remain a buyer of both stocks, though I like Intel more than Microsoft.