Microsoft Corporation (MSFT) Should Consider an Intel Divorce

The history of the computer is one of close relationships between device manufacturers, operating system publishers and the companies making CPUs. The most iconic of those relationships is that between Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC), commonly referred to as the “Wintel” partnership. However, the close union between the two that served so well during the PC era is beginning to hurt Microsoft. Is it time to consider a break-up?

Microsoft Corporation: Why MSFT Should Consider an Intel Divorce
Source: Intel

During the PC era, the combination of MSFT and INTC was unstoppable. In the Wintel partnership, Microsoft developed the Windows operating system that powered the vast majority of personal computers, while Intel manufactured the CPUs inside almost all of those boxes.

Both companies were caught off guard by the transition to mobile devices like smartphones and tablets, but while Microsoft has had some success in adapting to the new mobile, connected world, Intel has had a tougher time of it.

Has Wintel Reached the End?

MSFT developed Windows 10, a modern operating system designed as a platform to allow traditional PCs, mobile devices and even its Xbox gaming console to work together in offering a near seamless user experience. The company may have fumbled Windows on smartphones, but it hasn’t given up yet and has had considerable success with its Surface line of prosumer tablets.

Intel, on the other hand, was so slow to react to the rise of mobile devices that it has been a virtual non-player in the most important technology market of the last decade. Apple Inc. (NASDAQ:AAPL) uses ARM Holdings plc (ADR) (NASDAQ:ARMH) chips of its own design, while companies like Qualcomm, Inc. (NASDAQ:QCOM), Texas Instruments Incorporated (NASDAQ:TXN) and Samsung (OTCMKTS:SSNLF) dominate the market.

Intel tried to regain its PC leadership in the mobile era with the Atom line of processors, but never got much in the way of traction. One company that did go with Atom CPUs in some products was old Wintel partner Microsoft. And that’s where MSFT now finds itself in a tough position.

Earlier this year, INTC announced the cancellation of next generation Atom processors. This decision left Microsoft without an affordable CPU option for its Surface line of tablets. ARM processors aren’t an alternative — the original Surface RT used one of those, and while it could run Windows, it was incompatible with legacy Windows software, resulting in consumer confusion and a sales disaster. Intel’s Core M chips go for $281, which is way too expensive compared to the $37 for the Atom powering the current Surface 3 tablet.

With no new viable CPU to be had, Microsoft announced it is discontinuing the Surface 3 at the end of the year, with no known plans for a successor.

INTC’s decision also effectively quashes any hope for a rumored intel-based “Surface” Windows smartphone; one that could run native legacy Windows software. In another headache for MSFT, the company’s eagerly anticipated HoloLens augmented reality headset runs on — you guessed it — an Intel Atom CPU.

The close partnership between Microsoft and Intel paid off handsomely for both companies during the PC era. But now, Intel’s mobile struggles are having a negative impact on MSFT. Maybe it’s time to cut the cord?

A Few Alternatives for MSFT

Other companies have made the big switch and survived. Notably, Apple dropped the PowerPC processors used in Macs in favor of Intel CPUs starting in 2006. Doing so required considerable effort on the OS X side of things, but Apple gained better pricing and a more robust CPU roadmap. There was some pain for customers during the transition period, but the Mac platform ended up much stronger as a result. Now, Alphabet Inc‘s (NASDAQ:GOOG, NASDAQ:GOOGL) Google is in the CPU business, dropping INTC in favor of its own chip design to run AI in its cloud services.

The situation isn’t quite so simple for MSFT, unfortunately. If it wants to pursue a strategy of Windows 10 as a universal platform, with the full support for Windows software its customers expect, it needs to stick with x86 chips. And that means Intel or Advanced Micro Devices, Inc. (NASDAQ:AMD).

On the Surface, AMD would make sense and as an added bonus, it makes the CPU for the Xbox One –in fact, MSFT has been rumored to be looking at the chipmaker as a potential acquisition. There’s a big problem, though. AMD licenses the x86-chip architecture from INTC, and Intel would be crazy to sign off on a deal that would allow AMD to supplant it as Microsoft’s primary silicon partner.

This leaves MSFT with few options. The company could provide financial incentives to Intel to continue developing and producing the chips it needs. It could go the route of Apple and switch CPUs altogether, releasing Windows 10 as an ARM-based operating system, transitioning its user base away from INTC’s x86 chips.

Legacy Windows software could be run in emulation, although performance would likely take a hit. And given how long it takes to get legacy Windows PCs to upgrade, the transitional period could be very long, very painful and very expensive for Microsoft.

One thing’s for sure, though. If MSFT does nothing and relies on its old Wintel relationship with INTC, it continues to run the risk of its own hardware products — like the Surface 3 — and its Windows 10 cross-platform ambitions being hobbled by Intel’s struggles.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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