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Weekly Column

When Elephants Dance: The Impending War between Intel and Microsoft

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

When this column started, back in 1997, the median price of a personal computer sold in the United States was around $1,100, and that was down significantly from the $1,800 of five years before. Part of the cost drop was Microsoft paying a $400 rebate back then for every new PC purchaser who also signed up for MSN, but much of the price drop was a conscious decision on the part of the industry to lower prices and sell more -- lots more -- home computers. And it worked. Today the median price is down to $600 and all the homes that want computers pretty much have them, so today's PC market is all about replacement. But we're replacing our computers for the wrong reasons, and I can only conclude that the PC industry, itself, is dying. The end is coming.

There are good and bad reasons for replacing your personal computer. The best reason of all for getting a new PC is because your old PC isn't fast enough to run your new software. This was the traditional PC upgrade cycle that meant the industry was vital and growing. New apps required more horsepower, so you got a new PC, which was always an exciting day. Where are our new mip-burning apps today?

While the industry is trying mightily to get us to embrace video, for the most part today's apps are yesterday's apps and that's the problem. Today, we replace our personal computers when they break or when they get so sludged-up with spyware and viruses that it is easier to start from scratch than to cure the disease.

This is a profound trend. People who replace their PC to run new software are active consumers who are likely to buy more software and more computers in turn. They are indicators of a successful industry. People who replace their PC to sidestep the Hell of modern computer sludge aren't happy and are less likely to buy another computer in the future. Those people -- most people these days -- are actively looking for a platform shift.

These trends have profound implications. Sure, computer sales are fine for now, but that's because people are both in pain and needing a stop-gap solution. Once that solution is offered, though, sales will drop off a cliff because customer loyalty no longer exists.

So the industry grasps at the concept of a media PC, which hasn't worked very well so far. Part of the problem has been connectivity: How do you connect what has been effectively the Quicken machine in your home office with the TV in the family room? Part has been the annoying noise when you actually put the PC into the family room. Part has been pure dis-ease of use. And the rest is sticker shock. Why buy a media PC when you can get a TiVO box for $99?

There is an inevitable fallout coming. Already the number of name-brand PC manufacturers is falling and it will fall further still. Gross profit margins are getting thinner and certain companies -- primarily Intel and HP -- are especially vulnerable. Intel looks good on the surface, but much of its present success is based on sales of xBox game systems -- a product that will no longer use Intel processors as of November. With AMD nibbling away at both the lower and upper ends of its market, Intel no longer has the advantage of either a performance or a price premium. As for HP, it would do better to follow IBM's lead and simply sell-off its PC operation, something that could yet happen in the post-Carly world.

Intel doesn't have that option, though. Intel is a chip company and only a chip company, so it has to use its massive cash flow to transform the market into something that suits Intel, rather than transforming Intel into something thast suits the market.

That's why Intel is at war with Microsoft.

Microsoft has known for a long time that the PC as a platform is dying. The trends it sees for successor technologies are clear: mobility and gaming. Mobility means some combination of a handheld computer and a mobile phone. Gaming means xBox 360 and all that it can be -- a game system, a home media platform, a more-than-rudimentary Internet device and home PC.

Microsoft talks about OEM licensing the xBox, but that's a joke since the company loses money on every device. Would an HP or Dell want to enter a market in which it knew that break-even was two to three years away, and even then Microsoft could take away even that distant profit opportunity by introducing an xBox 720? Unless Microsoft is also willing to share its xBox software revenue (it isn't), xBox hardware licensing won't happen. But for a short moment the ploy may distract the PC companies, or that is Microsoft's hope. By the time they notice it will be too late and the home market will suddenly be all-Microsoft all the time. Or that's the plan.

Intel, meanwhile, is not a part of Microsoft's calculations.

Redmond has chosen IBM as its xBox hardware partner, so Intel must plot its revenge. This is not so much Paul Otellini taking out Bill Gates with an ice pick as it is Intel as an ongoing business trying to survive. The only way Intel can do that is by beating Microsoft on content delivery and networking, and by giving Microsoft something to worry about on the desktop, which was the basis of my original Apple/Intel theory. A theory I continue to believe, by the way.

So where Intel had been Microsoft's lap dog on so many previous technical initiatives, I'm sure we'll see some divergence, like Intel's partnering in the new Apple movie download service, which someone told me this week will be called iVideo.

If iVideo is the correct name, it implies that the new application will become part of Apple's iLife suite along with iMove, iTunes and other applications. This makes good sense even for Intel. Why? Because at this point it is more important to Intel for iVideo to be a success than it is for iVideo to use lots of Intel chips. The population of broadband-equipped OS X computers in the U.S. is around 10 million, and that's a good number for launching a new service and avoiding problems should it be literally TOO popular. The point is to make iVideo a hit, first with Mac users and with impatent Windows users who'll go out and buy a Mac Mini just to be able to run the app (that's the old model for upgrading, right?). Mac Minis quietly appeared last weekend at Best Buy and Target, for sale alongside the iPods. This is in preparation for the iVideo launch, which will presumably come in September or October, certainly before the xBox November launch.

Just as there was with iTunes, there will eventually be an iVideo for Windows, probably in February.

Microsoft, in turn, will make xBox the center of its own iVideo-like strategy, though again they'll be playing catch up. Here the game will come down to competing DRM standards and studio deals, where the parties are pretty evenly matched with the ultimate winner possibly decided by which camp Sony embraces with the PS3. It is doubtful that Sony will forge its own path in this, and you'll recall Sony's very high-level participation at the San Francisco MacWorld announcing the so-called "Year of HD" that started all this.

A year from now, it will be interesting to see whether Microsoft does the obvious and tries to move some version of xBox technology onto business desktops. After a decade of messing around, thin client computing is almost inevitable for businesses. Not only are existing computers too darned hard to service, support, and keep virus-free, but all the new legal requirements for protecting and preserving corporate data (Sarbanes Oxley, HIPAA, GLBA, FERC and so many others) pretty much demand some central data repository.

The xBox 360 would fit nicely into this niche, sold as a stripped-down model without the optical drive. Imagine the adrenalin rush in that Redmond conference room: "Hey, we can save money by removing some of the game-playing components, then charge businesses MORE for an xBox that won't play games!" Of course, this would upset Intel and all the hardware OEMs, so Microsoft would let them sell Office xBox's, too, though with Microsoft still making most of the profit, again doing nothing for Intel. At that point the median desktop computer will sell for $300.

So it all comes down to Microsoft and Intel and where the game goes is anybody's guess.

When elephants dance, the grass is trampled.

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