Trouble in paradise? Cracks show in Microsoft-Intel alliance

When Microsoft unveiled its Surface tablets earlier this year, Intel executives were shocked.

Microsoft started developing its self-branded tablets -- including one that uses an Intel chip -- without notifying Intel or asking for help. Intel, like many of Microsoft's other partners, didn't find out about Surface until shortly before the event, and it did not play a role in the announcement. Microsoft decided to go it alone, much like rival Apple has done.

Microsoft's decision represents new territory for the software and chip giants -- collectively known as the Wintel alliance to many in the industry -- and it's one of a growing number of cracks between the two that have appeared over the past few years. The strains in their longstanding relationship underscore the pressures technology companies face as they move into a more mobile world, forcing them to stray from existing cozy relationships and strike new alliances. Intel and Microsoft, giants in the PC world, face a particular challenge: adapting to new forms of computing without making their incumbent technology obsolete.

"When you have two powerful companies whose mutual growth can help each other, then things go pretty well," said Patrick Moorhead, principal analyst at Moor Insights & Strategy. "But in this situation where neither Microsoft or Intel has done much in mobile, that's where you're starting to see fractures.... Microsoft didn't believe Intel was doing enough to lower the wattage or price of its processors to get them where they needed to be in mobile."

The latest evidence of tension came yesterday when Intel Chief Executive Paul Otellini told staffers during a meeting in Taiwan that Microsoft was releasing Windows 8 before it's completely ready. Today, Intel issued a statement reiterating its support for Microsoft and Windows.

"Windows 8 is one of the best things that ever happened to Intel," the company said.

Of course Intel is going to stick by Microsoft. New versions of Windows drive demand for the latest Intel chips, and that's allowed the companies to dominate their respective fields. But it's been a rocky time for the two over the past couple of years.

Rise of mobile
Most of the problems go back to smartphones and tablets. With PC growth slowing, it's vital for Intel and Microsoft to expand into mobile devices. The problem is, neither is doing a really good job at it.

In the second quarter, only 2.7 percent of phone sales in the world run on Microsoft's Windows Phone operating system, according to Gartner. And Intel, while gaining traction in handsets, isn't in enough smartphones and tablets to make a dent. It can boast of only a handful of Intel-powered phones, including the recently unveiled Motorola Razr i. Both companies say it's early, but the fact is they still have a lot of catch-up to do.

The move to mobile has tested the Wintel alliance. When developing their respective strategies, Intel and Microsoft hedged their bets with companies besides each other. For Microsoft, it was making Windows run on low-power chips from companies other than Intel and AMD, working instead with mobile stalwarts such as Qualcomm.

For Intel, it meant working with Google's Android operating system and developing software of its own.

Microsoft re-ARMs with Windows 8
The rift between Microsoft and Intel likely originated with Microsoft CEO Steve Ballmer's keynote at the Consumer Electronics Show in January 2011. At that time, Ballmer said the newest version of Windows -- which hits the market next month -- would be the first to work with processors based on ARM Holdings architecture.

Such chips -- which are made by companies like Qualcomm, Nvidia, and Texas Instruments -- typically are more power efficient than the x86 processors from Intel and AMD that run in PCs. That's allowed ARM-based chips to power nearly all mobile devices, including the iPhone and iPad.

Windows Phone-based handsets currently use Qualcomm chips, and one of Microsoft's Surface tablets uses a processor from Nvidia. The other uses an Intel chip, but it also requires a fan for cooling. The processor used in that device is one of Intel's laptop chips, not its Atom processor that targets smartphones and tablets.

Microsoft's commitment to use ARM chips has caused some headaches for Intel. Renee James, the head of Intel's software business, told attendees at an investor meeting in May 2011 that Windows RT wouldn't run programs created for previous versions of Windows. Microsoft contradicted her comments, telling various publications that the statement was "factually inaccurate and unfortunately misleading." It didn't specify what was wrong, and Microsoft has since said legacy applications wouldn't work with Windows RT.

Intel believes it has nearly closed the power gap with ARM chips. The company says it now designs its processors with energy efficiency in mind, and it believes the chips will show up in many different smartphones, tablets, and thin-and-light notebooks. Motorola, Lenovo, and a couple of other companies have launched or will launch Intel-powered phones, and others will likely follow.

While CES 2011 was a low point for the Wintel relationship, Microsoft has tended to talk less about its longtime silicon partners and more about itself during other presentations. In recent trade shows like Computex and the Mobile World Congress, particularly last year, Microsoft made scant mention of its longtime chip partners.

As Microsoft started partnering with Intel's chip rivals, Intel looked to other software makers. Otellini, speaking during a keynote address at Intel's developers' conference in September 2011, announced the chipmaker had started working more closely with Google's Android operating system. The two companies would optimize Android for Intel chips, making it easier for Android handset makers to use Intel processors.

Intel has been making a big investment in Android, though it doesn't provide specifics on how much it is spending. As one example of its dedication to the operating system, it has hired about 1,200 engineers in the past couple of years to work on Android. It hasn't detailed the number of engineers working on Windows, but the headcount likely numbers in the thousands.

Intel also has been developing open-source software of its own. Its first attempt with Nokia, dubbed MeeGo, flopped, but a new version of the operating system, called Tizen, is being developed with Samsung. Samsung reportedly plans to release Tizen smartphones later this year or early next year.

A relationship renewed
Tensions have started to thaw between Microsoft and Intel in recent months, some insiders say. That's partly because Windows RT, the version of the OS that works with ARM-based chips, has faced some hiccups.

Microsoft limited the number of companies that can make tablets and convertible notebooks for the software, in part to have more control over design and make sure the devices were up to snuff. But some PC makers, including Hewlett-Packard and Toshiba, have scrapped immediate plans for Windows RT devices. And there's speculation other devices may not be ready for launch this year.

HP and Toshiba, who still plan to work on Windows 8 devices at some point, changed course after Microsoft took the unusual step of unveiling its two Surface tablets. Intel didn't know about the devices much in advance, but neither did any of Microsoft's other chip or PC partners. It's believed that Microsoft developed Surface partly because it was worried about the quality of its partners' devices.

Windows 8, despite Otellini's comments yesterday, seems to be going better. Intel has said it's working with PC partners on about 20 tablets for Windows 8, and it's hosting an event tomorrow to show off some of those devices.

An Intel representative told CNET today that the 30-year collaboration between the semiconductor giant and Microsoft is "as strong as ever, and Windows 8 presents new opportunities to showcase innovation together." Some of the new features include touch capabilities, power management, security, graphics, and multimedia performance.

Microsoft, meanwhile, declined to comment beyond reiterating that Windows 8 is "the most tested, reviewed and ready operating system" in the company's history.

Ultimately, Microsoft and Intel still need each other. They're making progress in mobile devices, but most of their revenue is still tied to PCs. The ARM-based chipmakers have said they'd power computers at some point, but processors from Intel (or AMD) are still the best option for notebooks and desktops at this time.

If Windows 8 flops, it's bad for Intel and Microsoft. If it's successful, it could be the big chance for them to finally make some waves in the mobile world. Either way, the fortunes of Intel and Microsoft will stay linked for a long, long time.