One of the interesting rumors to percolate these days is the prospect that former Intel (NASDAQ:INTC) CTO and current VMware (NYSE:VMW) CEO Pat Gelsinger would take the reigns as the new CEO of Microsoft (NASDAQ:MSFT). It is an interesting scenario to say the least, as Gelsinger moved quite far up the ranks at Intel before exiting the company during a management shuffle in 2009 when he landed at EMC (EMC), the majority owner of VMware. Gelsinger is one of the few people remaining in the industry who have an intimate understanding of how "Wintel" operates and perhaps is a sign that consolidation continues to reign as Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Microsoft wrestle for dominance in the new Mobile Era.
Coincidences seem to arise in multiples and should be viewed as harbingers of possible future trends. The resignation of Intel's Paul Otellini came not too long after AMD's (NYSE:AMD) CEO Dirk Meyer disagreed with the board over the need to be more aggressive in the mobile market. His replacement at first directed the troops towards mobile but then apparently reoriented them into a new model that provides x86+Graphics solutions to major gaming houses (Sony, Microsoft and Nintendo). It is one of the trends I suggested in an earlier writing that gets them out of Intel's direct line of sight. However, it is low margin whose one upside is that it eliminates the need for sales and marketing to the general public, as communicated to analysts recently. Could Intel's future be somewhat similar?
I have yet to see anyone point out that the big mobile players (AMZN, AAPL, GOOG, and MSFT) now have a combined market cap of $1.35 trillion or roughly 11 times more than Intel. Back in 2000, Intel and Microsoft were more evenly market cap weighted as the force behind Wintel. For the mobile players, higher valuation seems to be held back only by the economics of the hardware they can parlay to end users and the giant data centers that are required to deliver every inquiry instantly. As Amazon speaks of future drones that extend their reach across the time delay chasm of delivery trucks, the rivals look to keep their users hands occupied.
Unlike the Mobile Giants, Intel's field of delivery is shrinking. There are fewer customers to take their silicon as compared to the glory days of the 1990s when screwdriver shops were everywhere. And the valuations of their older generation PC OEMS is falling further and further behind that of the mobile players. Will the company be able to continue selling high margin silicon to Google, Amazon, Apple and Microsoft or do they trend towards being a design house with an advanced process technology? The Bloomberg rumor that Google is looking at designing its own server processors should not be a shock, there are however plenty of companies in the bidding to be the purveyors: Nvidia (NASDAQ:NVDA), AMD, AMCC (NASDAQ:AMCC) and Calxeda to name a few. Perhaps Google has in mind a server chip that is more cost efficient for its software running in its datacenter than what Intel offers.
Microsoft's center of gravity has always been the PC in the corporate environment. After a couple years of wandering about trying to figure out the "key to mobile," they appear to be solidifying around the tablet as an extension of the notebook PC, just smaller and lighter and pre-loaded with their software on a subscription basis. They now have to make the hardware free by riding the cost curve down on components, especially silicon.
Should Microsoft hire Gelsinger, then Intel is in play, as the majority of its silicon now and in the future will continue to run a Microsoft O/S and the full suite of applications. It sounds too farfetched for most of us, who have watched these giants for over twenty years drive the refresh cycle of the PC market at the cadence of Moore's Law. And yet does Microsoft not see that the vertical model being employed by Samsung (OTC:SSNLF) and Apple includes the complete combination of hardware and software, with the optimized processor as the starting point?
Let's not forget that the Intel Data Center Group is the engine that drives a significant amount of the profit funding advanced process development and processor design. It also represents a possible choke point in the industry. Gelsinger understands this clearly as does Bill Gates, Larry and Sergey and Tim Cook. If Microsoft appoints Gelsinger, then, assuming there are no roadblocks, the Wintel empire will consolidate and allow Microsoft to go vertical in order to compete with Samsung, Google and Apple, with the first goal of reinforcing the castle walls around corporate. The second will be to win the Data Center Wars.
Disclosure: I am long AAPL, INTC, QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.