The prompt shift to low-cost mobile computing has taken Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC) by storm. During the rise of the PC, Microsoft and Intel formed the powerful duo lovingly referred to as Wintel, enjoying the highest margins within the PC value chain.
Investors have gotten used to those levels of profitability. However, as consumer trends shift toward lower-cost mobile alternatives in smartphones and tablets, the two companies must now navigate a difficult transition. The companies putting direct heat on Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC) are Google Inc (NASDAQ:GOOG) and ARM Holdings plc (ADR) (NASDAQ:ARMH), respectively.
Microsoft and Google
Sales of small-sized tablets are skyrocketing, and respectable Android devices can be bought for just $199. That price point doesn’t leave much room for rivals like Microsoft Corporation (NASDAQ:MSFT) to charge the hefty software licensing fees that it’s accustomed to, all because Google Inc (NASDAQ:GOOG) is willing to give open-source Android to OEMs for free. It was rumored that the first wave of Windows RT devices were costing OEMs as much as a whopping $85 per unit.
Microsoft’s biggest cash cows have always been Windows and Office, but the software giant must come to terms with the fact that it can’t generate as much per unit as it used to. That’s precisely why Microsoft Corporation (NASDAQ:MSFT) has been cutting deals with OEMs for smaller devices. Furthermore, Microsoft is also now bundling free copies of Office 2013 with these smaller devices, such as the new Acer Iconia W3, confirming the earlier rumors to that effect.
Intel and ARM
Thanks to competition within ARM Holdings plc (ADR) (NASDAQ:ARMH)’s broad ecosystem of licensee chipmakers such as QUALCOMM, Inc. (NASDAQ:QCOM) and NVIDIA Corporation (NASDAQ:NVDA), ARM chips have always been far cheaper than Intel Corporation (NASDAQ:INTC)’s processors. Combined with better power efficiency, ARM chips have been ideal for mobile devices. Intel has made a lot of progress on the power-efficiency front, but now the chip giant will need to make concessions on pricing to be competitive.
Intel Corporation (NASDAQ:INTC)’s upcoming Bay Trail chips may cost less than $50, which is lower than the prices it enjoys with its PC processors. That’s still higher than what most ARM Holdings plc (ADR) (NASDAQ:ARMH)-based chip makers charge, but it’s much more competitive.
Microsoft and Intel
The software and chip giants both have no choice but to accept lower pricing if they hope to maintain relevance in the age of low-cost mobile computing. Google Inc (NASDAQ:GOOG)’s disruptive approach with Android gives OEMs a cheaper alternative operating system, while competition within the ARM Holdings plc (ADR) (NASDAQ:ARMH) ecosystem removes Intel Corporation (NASDAQ:INTC)’s pricing power. The result may be longer-term pressure on margins for both titans, as neither had to face competition like this before during the PC’s heyday.
The article Microsoft and Intel in the Age of Low-Cost Mobile Computing originally appeared on Fool.com.
Fool contributor Evan Niu, CFA, has no position in any stocks mentioned. The Motley Fool recommends Google and Intel and owns shares of Google, Intel, and Microsoft.
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