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I am bullish on both Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT), so it's interesting to observe the shifting dynamic between these two computing powerhouses. In the traditional PC space, not much has really changed: Windows 8 still runs only on Intel-compatible chips. However, in the broad paradigm shift to smartphones and tablets, Microsoft and Intel seem to be slowly but surely growing apart. So, the question is, who stands to lose?

Windows Phone 8: Powered By Qualcomm

Microsoft's Windows Phone 8 is designed to run on ARM (NASDAQ:ARMH) compatible architectures, and it seems that the handset vendors have unanimously chosen to use Qualcomm's (NASDAQ:QCOM) Snapdragon S4 system-on-chip. While Microsoft's Windows Phone platform has failed to gains significant traction in the smartphone market against phones based on Google's (NASDAQ:GOOG) Android and Apple's (NASDAQ:AAPL) iOS, Windows Phone 8 and its successors have a very real chance of succeeding.

While Intel is finding a home for its new smartphone-targeted Atom chips in Android devices, it seems extremely puzzling that Intel didn't make an aggressive push into phones based on Microsoft's platform. The Android smartphone market is crowded and it will likely prove difficult for Intel to really stand out unless it is able to put out a system-on-chip solution that very clearly beats competing solutions from Qualcomm, Nvidia (NASDAQ:NVDA), and Texas Instruments (NASDAQ:TXN) in performance and performance per watt.

Windows Phone is still in its infancy as far as market share and adoption go. The space isn't yet crowded and there's still a lot of room for growth, especially at the expense of Android and iOS market share. Intel's Hermann Eul, president of Intel's Mobile Communications Group, expressed some interest in the Windows Phone space:

"We would be [interested] when we see that this market has a good chance to return our money that we have invested into this. Our roadmap has devices that can support Windows also on phones. So we can do that. The hooks for doing that [are] there."

The Intel executive further remarked,

"The current trend of statistics is pretty clear, Android is gaining the largest share of the market so that is where the money is"

While I agree that the majority of phones will run on Android going forward, not aggressively targeting Microsoft's platform is unwise.

Windows RT: A Real Fly In Intel's Soup

While I think that the idea that notebooks will go extinct is ignorant at best and fear mongering at worst, the reality is that performance in lower-end tablets is becoming "good enough" for a non-trivial portion of users. Contrary to what Intel bears would like you to believe, Intel's tablet approach is quite aggressive:

For high-end convertibles, thin-and-light, and even simply higher performance traditional tablets, Intel's current low power "Ivy Bridge" and its successor "Haswell" should be in a league of their own; there's no ARM-compatible product that even comes close to being as fast as the lowest power mainstream "Core" chips from Intel.

At the lower end, however, Intel's got a real problem. While its own "Atom" product lineup will be able to hold its own against the ARM-based competition in the performance per watt arena, cost and feature set on the software side are huge unknowns. See, Microsoft is also putting out a version of Windows 8, called Windows RT, that will run on ARM-compatible system-on-chips. A plus for Intel is that tablets based on this OS will be less compatible with legacy Windows software, potentially giving Intel an advantage here.

The flip side of the coin is that Windows RT tablets will likely be cheaper (although the prices of Atom-based Windows 8 tablets have not yet been confirmed). Further, Windows RT will come bundled with a free version of Office. While this will not be the fully-featured version of Office available on traditional Windows 8, it will likely be good enough for consumers.

To further bolster this view, Microsoft is actually going ahead and releasing its own tablets under the "Surface" brand name. The consumer-oriented models will actually ship with an ARM-based Nvidia Tegra 3, and the higher performance "professional" model will come with an Intel Core i5.

I'm not sure why Microsoft decided to fragment its ecosystem by providing both Windows RT and Windows 8, but to me this seems like a clear attempt for Microsoft to lessen its attachment to Intel and compatible processors.

Conclusion

While Intel has hedged its bets by partnering up with Google and the Android ecosystem, Microsoft is still a critical piece to the Intel puzzle. After all, it was due to Microsoft that the Intel-based chips were able to shoot down all other competition such as MIPS (NASDAQ:MIPS), IBM (NYSE:IBM), and Sun/Oracle (NYSE:ORCL). Losing Microsoft as a friend is a very serious risk that Intel and its shareholders should be very, very afraid of.

Source: Does Intel Need To Patch Things Up With Microsoft?

Additional disclosure: I may initiate a long position in MSFT over the next 72 hours.