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Wintel equation favors Microsoft

As Intel's business is getting squeezed by low-cost chipmakers and the sub-$1,000 PC market, Microsoft has been pulling further away from its competition.

Microsoft and Intel have been partners for years, to such a degree that their product alliance came to be morphed into the bastardized shorthand Wintel.

In the last couple of years, however, destiny began to diverge for the two companies. As Intel's business became increasingly squeezed by low-cost chipmakers and the sub-$1,000 PC phenomenon, Windows has been pulling further away from its software competition while managing to elude the type of pricing pressures that have besieged Microsoft's chipmaking ally.

To be sure, the reasons behind the disparate fortunes of the two halves of Wintel go well beyond the alliance itself. But the dynamics of their relationship came into rare focus today with renewed allegations that Microsoft bullied Intel into shelving new technology efforts that conflicted with the software giant's ambitions. (See related story)

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On the desktop, Microsoft's Windows last year held 86 percent of the OS market, while its previous DOS system represented only 2.3 percent. Meanwhile, Apple's Macintosh OS held 4.6 percent of the market, and other systems, such as IBM's OS/2, represented 7.1 percent, said John Puricelli, an analyst with A.G. Edwards. He added that Microsoft's share is expected to grow to between 91 percent and 92 percent this year.

In addition, while Intel faces pressures from the continuing plunge in PC prices, Microsoft has yet to encounter anything so devastating in its marketplace.

Analysts point out that the retail price of Windows operating systems has remained steady, while the prices of many chips that run the same PCs have plummeted. In addition, the price of Windows 95 has not fallen--even with the recent roll-out of its upgrade, Windows 98.

Microsoft also is protected by the sharp drop in PC prices, because it continues to collect the same OS licensing fees from computer makers even as their profit margins dwindle.

"Microsoft hasn't been hurt by the sub-$1,000 market, but they have warned that this may happen in the future," Puricelli said. "They said that the buyers of sub-$1,000s probably won't buy as much add-on software."

Microsoft also is expected to gain further ground with its workstations and handheld devices.

With its NT operating system, the company has been gaining market share over longtime heavyweight Unix. Despite criticism about its ability to handle more capacity, NT is gaining favor because it is a much cheaper alternative, independent analyst Mary McCaffrey.

In new markets, such as handheld computers, Puricelli said Windows is expected to capture the lead over such players as the GEOS 3.0 operating system with its Windows CE operating system, which is used in Brother International's GeoBook.

"Microsoft is trying to be like IBM," Puricelli said. "IBM supplies hardware for desktops, servers, portables. Microsoft wants to be that for software. It wants to be the OS for all people."

Along the way toward that goal, Microsoft has not shied from conflicts with partners, as well as competitors.

"There have been some very tumultuous relationships that Microsoft has had with its partners, like Citrix, in which they had a relationship and someone on their board and then Microsoft said it would go into their business," McCaffrey said.

Microsoft's relationship has been strained even with its closest of allies. Internal Intel memos allege that Microsoft chief executive Bill Gates made "vague threats" that the software giant would offer increasing support to Intel's competitors unless the chip giant backed away from supporting software development from the Internet, the New York Times reported today.

"I can't speculate on what kinds of new allegations the government will create in the final days leading up to the [September 23 antitrust] trial," Microsoft spokesman Tom Pilla said. "Microsoft and Intel have worked closely together to make sure our products work well with each other and for the benefit of our customers."

Last year, Citrix's stock plummeted on news that Microsoft might enter the niche software maker's market. But in the end, Citrix reached an agreement with Microsoft, which basically resulted in trading some of its intellectual property in order to access NT 4.0.

Apple Computer, which received a $150 million investment from Microsoft, also has had some disagreements with its partner. Apple last month said it was subpoenaed by the DOJ. Regulators were investigating allegations charging that that the software giant tried to pressure Apple into stepping away from the multimedia business.

A former Apple employee told CNET that Microsoft has proposed holding off on developing its own multimedia products in exchange for Apple's agreement to refrain from advancing other technologies.