Microsoft, Intel Still a Power Couple
As trustbusters lay out their case against Microsoft Corp. in a highly publicized antitrust trial, they have opened a window into what is arguably the technology world’s most powerful alliance: the nexus between Intel Corp. and Microsoft, feared and revered everywhere as the “Wintel” duopoly.
As part of its case, the Justice Department will try to show in the coming weeks that Microsoft threatened Intel in an effort to bully the chip maker into abandoning a multimedia technology that the software giant opposed.
That’s juicy stuff considering Intel is a powerful monopolist in its own right, according to the Federal Trade Commission. That agency charged Intel in June in a separate case with using its monopoly power to pressure a rival into sharing its technology.
Coming at a time when Intel and Microsoft both have taken steps that appear to undercut each other, some observers point to the Justice Department’s evidence as further signs that computerdom’s grand alliance is beginning to crack.
Over the last month, Intel has invested in a company that distributes Linux, a competitor to Microsoft’s Windows NT operating system, and signed a technology- sharing deal with RealNetworks, Microsoft’s rival in the business of supplying software to play audio and video over the Internet.
The notion that these two great computer powers are at loggerheads is gaining currency as both come under fire for their business practices. But experts and industry insiders say that while the two partners often quarrel, their common interests remain startlingly close in the personal computer business that is at the core of each company’s earnings.
“If anything, they are consolidating their strength,” says Mitch Ratcliffe, president of Internet/Media Strategies Inc., a Lakewood, Wash.-based consulting firm and longtime observer of the two companies.
Microsoft and Intel executives admit their companies’ interests are parallel in 80% to 90% of the markets in which they participate.
“There is more interchange today [with Intel] than there ever was before,” says Carl Stork, general manager of hardware strategy and business development at Redmond, Wash.-based Microsoft.
Adds Patrick Gelsinger, general manager of Intel’s desktop products group: “We have a common view of where we’re trying to take the industry.”
A Union Formed Over IBM Deal
The Wintel duopoly was born in 1981 when Armonk, N.Y.-based IBM Corp. chose Intel to supply the microprocessor brains for its new IBM PC and turned to Microsoft for the machine’s software operating system.
As the personal computer industry grew, IBM’s role shrunk while Intel and Microsoft flourished as suppliers and standard-bearers for the booming high-tech sector. Now, however, some observers believe the Wintel era may be coming to an end as new growth markets begin to overshadow the traditional PC industry in importance.
“Since both [companies] need to grow faster than the PC’s 15% growth rate, both are looking for new markets,” says Jim Davidson, managing director for technology at the San Francisco-based investment house Hambrecht & Quist. As the two companies explore new areas of growth, the potential for differences grows, Davidson argues.
In the new under-$1,000 PC segment, for example, Santa Clara, Calif.-based Intel has been slow to come up with low-cost chips, leaving an opening for Advanced Micro Devices and National Semiconductor Corp. to increase their share with competing chips. Microsoft, which is happy to see vigorous growth in that market, has worked closely with the Intel rivals.
And as the market for “Internet appliances” takes off, experts say Intel and Microsoft are likely to find themselves more often competing with each other. Framingham, Mass.-based research firm IDC predicts the market for such devices as televisions, phones and hand-held computers linked to the Web will climb from just 3 million last year to more than 50 million by 2002.
Microsoft’s Windows CE software for WebTV and other consumer devices is designed primarily to run on non-Intel chips, for example.
Intel, in turn, is trying to persuade vendors of large computer systems that use Unix, a competitor to Windows NT, to put their software on Intel-based machines. Intel is shooting for a greater share of the profitable and rapidly growing market for servers--computers used to run networks.
The company has been a heavy supporter, for example, of companies using Sun Microsystems’ Java language to write server software. Microsoft sees Java as a threat because programs written in the software can run on all types of computer systems, potentially undercutting the value of Microsoft’s crown jewel, its Windows brand.
Intel has a testing laboratory to help companies improve the performance of their Java programs on Intel chips. “Intel’s goal was to make sure our software runs best on Intel’s chips,” says David Dewan, vice president of product strategy for SilverStream, whose software is written in Java.
Intel is riding an industry trend toward handling more and more computing tasks on the server rather than the desktop, a trend that could hurt Microsoft, whose power base is on the desktop.
Intel is also hedging its bets in the server market with its investment in Red Hat, which distributes Linux software widely used to host Web sites.
“We will use this investment to establish ourselves as a viable alternative” to Windows, says Bob Young, chief executive of Red Hat. “I don’t get a sense that Intel is as committed to Microsoft as people suggest when they talk of a Wintel duopoly.”
By supporting Linux, widely regarded as an anti-Microsoft system, Intel could also win support among many members of the technical community who dislike Microsoft.
“Now Intel is on the side of the forces of good,” says John Hall, executive director of Linux International, an industry group promoting Linux. “If I had to choose between buying an AMD chip or an Intel, I might choose Intel.”
Intel’s deal with RealNetworks is also designed to strengthen Intel’s position in the server market by boosting the ability of Intel-based machines to send video and sound over the Net using RealNetworks’ software.
Intel has also been an aggressive supporter of BeOS, an operating system that hopes to cut into the Windows market by offering vastly improved graphics capabilities. Graphics applications are particularly attractive to Intel because they require the processing power of Intel’s most advanced, and therefore most expensive, chips.
But how significant are these efforts by Microsoft and Intel to move beyond the Wintel alliance?
Insiders point out that the two companies have always explored new paths to growth that didn’t necessarily jibe with their partners’ plans. Intel was an early investor in NextStep, Steve Jobs’ effort to develop a next-generation operating system to compete with Microsoft. Intel was also an investor in Go Computing, a handwriting-recognition software company that blames its demise on Microsoft.
“The start-up companies are chess pieces,” says Ratcliffe. “It’s [Intel CEO] Craig Barrett and [Bill] Gates sitting at the table.”
In each case, the investments act as hedges for the two partners in the event that the other fails to perform. The investments are also bargaining chips the companies can use as they negotiate future standards.
Still Close in Important Markets
But brush aside these tactical moves and the giants are still close allies in their most important markets. They reflect this by communicating regularly, even in areas of potential conflict. “We’re very diligent about keeping each other informed of actions that might be interpreted as negative by the other,” said Intel’s Gelsinger.
Microsoft’s next-generation Windows NT 5.0 and Intel’s next-generation Merced chip, analysts say, may be just the right techno-cocktail to push the PC into the higher reaches of corporate computing. Here the Wintel alliance is working closely to persuade software developers to write their applications for these new high-end servers.
“Microsoft and Intel share the view that we can make server hardware very, very price-competitive by leveraging PC economics,” said Microsoft’s Stork. “Windows NT has been a clear demand driver for Intel chips.”
In the consumer devices areas, Intel is beginning to make a strong play. With its acquisition from Digital Equipment of StrongARM, a chip specifically designed for such consumer devices as TV set-top boxes, Intel is now positioned to compete in a market where it has been largely absent.
Hewlett-Packard chose the StrongARM chip for its Windows CE hand-held computer, and many expect that the Wintel alliance has a good shot at emerging as the standard for at least a few key consumer devices.
“StrongARM and Windows CE are a powerful play,” says Harry Zenik, vice president of Redwood City, Calif.-based Zona Research.
Details emerging from the U.S. case against Microsoft suggest one reason the Wintel alliance has endured has been Microsoft’s power to squelch Intel efforts at straying from the Microsoft agenda. For example, Intel dropped work on its Intel JMedia Player, a software developer kit it spent more than a year on with Sun, reportedly because of complaints from Microsoft.
Whatever the reason, both sides say Java is no longer a wedge dividing them. “We’re in a very high degree of alignment on Java and how to implement it,” says Intel’s Gelsinger.
The flare-up between the two companies over Intel’s effort to get hardware makers to adopt its native signal processing multimedia technology was also resolved when Intel backed down.
But such perspectives underestimate Intel’s continued power.
“Intel is still the technology leader that is driving the industry in speed and functionality,” says Mal Ransom, senior vice president at Packard Bell NEC.
Although a few of the 125 or so start-ups Intel has invested in represent potential challenges to Microsoft, such as Red Hat, there are dozens more in which Intel and Microsoft are either joint investors, as with the Internet search technology firm Inktomi, or in which their interests are closely aligned.
Even in entirely new areas in which Intel and Windows technology offers little leverage, the companies have enormous power.
“They are influential because they are smart,” says Dan Dulchinos, director of business development at Cable Television Laboratory, an industry research group that accepted competing proposals last week from Microsoft and Intel. Intel and Microsoft now insist they do not differ in their visions for cable television.
“In most cases, we end up disagreeing but find a way to agree over time, where neither company caves,” Gelsinger says. “Neither of the tankers does sharp right turns, but we pick an island about 200 miles ahead where we can come up with a plan that works for each other and the industry.”
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Times staff writer Leslie Helm can be reached via e-mail at leslie.helm@latimes.com. Times staff writer Charles Piller can be reached via e-mail at charles.piller@latimes.com.
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A Complicated Relationship
On One Hand ...
The “Wintel” alliance of Microsoft and Intel is still strong after 16 years, and its influence is growing.
* Windows 98 and Intel’s Pentium II remain the overwhelmingly popular combination in personal computers sold today.
* Microsoft’s next-generation Windows NT 5.0 software and Intel’s next-generation Merced chip, both due out next year, are widely seen as the emerging standard for corporate business applications.
* There could be an emerging standard in the consumer area. Hewlett-Packard chose Microsoft’s Windows CE for palmtops and Intel’s new StrongARM processor for its hand-held computer.
... but on the Other ...
Intel is supporting Microsoft competitors:
* Red Hat: distributor of Linux software, a competitor to Windows NT.
* Be Inc.: Developer of BeOS graphics operating system for PCs that is a potential competitor to Windows 98.
* RealNetworks: Sells software for playing video and audio over the Internet. Competes with Microsoft’s NetShow product.
And Microsoft is supporting Intel competitors:
* Microsoft works closely with AMD and Cyrix, which produce clones of the Intel microprocessors used in personal computers.
* Microsoft’s Windows CE software for TV set-top boxes uses chips from Hitachi and MIPS, not Intel.
