Breaking Up Is Hard to Do: Intel and Microsoft Split

Wintel, the partnership between Microsoft's Windows and Intel's chips, was arguably the most successful business collaboration of the modern era.

Intel Inside was the best, and possibly the only, slogan to define the power, intelligence and potential of technology on contemporary society and the economy that supports it. Windows was, for most of that time, the only introduction to computer usage with which most humans were familiar.

Wintel dominated the competition even as it ushered in The Computer Age.

And now it appears to be over. As the following article explains, the pressure of mobile phone and tablet computing as well as mobile commerce has driven the former heavyweight into its corner, too battered, possibly, to ever reemerge as a contender. Intel's current CEO is taking early retirement. Microsoft's CEO hangs on, under siege but defiantly demanding one last chance (there have been about a dozen of them over the past few years) to redeem himself and demonstrate that he is a worthy successor to Bill Gates and not just a lucky bureaucrat who got to manage the decline of something bigger than he was.

To survive, the two companies have apparently determined their chances are better alone than together. They are seeking new partners, uncoupling the decades-long partnership that defined each of them. Whether the split will provide a solution or merely heighten the profile of the myriad challenges is subject to debate. Both are formidable enterprises with proud and rich histories. But like so many before them, they clung too long to what worked rather than taking the risk that the leap to a new future might be optimal - and least threatening - path.

Acquisition or merger seems a likely end for either or both. But this is truly the end of an era - and worthy of note. JL

Dana Blankenhorn comments in The Motley Fool:

For decades, the most successful team in technology was Microsoft and Intel. Microsoft defined the Windows software, and Intel designed the x86 chips that software ran on. Brad Pitt and Angelina Jolie were Brangelina, Microsoft and Intel were Wintel.

But Microsoft's failure with Windows RT, the new interface introduced with Windows 8, to give it play over Christmas in tablets and phones has caused a rethink, and an important schism. This was the big story of last week's Consumer Electronics Show. Samsung quietly shelved plans for a Windows RT tablet, reporters admitted that Windows RT looks doomed and – more important – Intel took control of the x86's future feature set by mandating “touch” interfaces in future laptops.

Intel has seen this trouble coming for a long time. A decade ago the firm was hiring consultants to tell it why it was having trouble selling mobile chips to Chinese OEMs. The answer then was the same as it is now – OEMs don't want parts, they want designs that sell. Freedom, to them, is just another word for nothing left to lose. The handcuffs of a reliable order flow mean more.

The best example of this is Foxconn, also known as Hon Hai Precision Industry Co. Ltd., of Taipei. It had mainly been making motherboards for Intel for over a decade, but rose to immense prominence later in the decade by subcontracting with Apple for manufacturing its iPod, iPhone and iPad. The company is now traded in London under the symbol HHPD and has a market cap of nearly $37 billion, against Intel's $108 billion.

The success of ARM Holdings in selling designs that companies like Apple could then turn into custom microprocessors is another threat. Over the last five years shares of ARMH are up 565%, while those of Intel are flat.

Intel Orders Touch

The “order” to support touch from Intel is, in my view, only the first of what will be several moves in the coming year aimed at separating the fate of INTC from that of MSFT. This will accelerate once CEO Paul Otellini makes his retirement official this summer, after his successor is chosen, and my guess is it's the key question his potential successors are being asked in their interviews for the job.

Otellini chose to retire before age 65 in order to give his company time and space to make that kind of choice. So far, all the possible candidates being mentioned are insiders, but you can bet that even an “insider” successor will have an “outsider” perspective on what needs to be done.

What will that mean for Intel shareholders? The stock currently trades at a PE of less than 10, with a dividend yielding 4.14. If Wall Street becomes convinced that Intel is serious about changing itself and taking back control over its destiny, you can easily see $30/share by the end of this year.