Microsoft Corp is taking its biggest step away from a long-standing, lucrative alliance with Intel Corp, teaming up with Britain's ARM Holdings to take on Apple Inc in the red-hot tablet and smartphone arena.
Microsoft, the second-largest U.S. technology firm, plans to design a Windows operating system compatible with chips designed by ARM, an Intel rival and the dominant producer of chips for smartphones and tablet computers.
Chief Executive Steve Ballmer pitched the move in a typically ebullient opening address at the Consumer Electronics Show in Las Vegas, looking to convince investors that his company can hold its dominance in a world moving away from PC-centric computing.
Whatever device you use, now or in the future, Windows will be there, said Ballmer, stalking the stage in a packed, supportive auditorium, in his trademark blue shirt and slacks. Windows will be everywhere on every kind of device, without compromise.
Investors and analysts were not immediately convinced that the software giant can maintain the dominance of Windows as Apple's iPad leads the exploding tablet market and Google's Android smartphone systems take off.
The PC is not going to be the 95 percent dominant solution five years from now, said IDC analyst Al Hilwa. The trajectory of the iPad and all these Android devices is to take on multiple form factors.
The lack of a coherent strategy on tablets hobbled Microsoft's share price last year, and its shares continue to trade around the same level they did eight years ago.
We've already seen that the personal computer has lost dominance as a computing platform, said Brendan Barnicle, an analyst at Pacific Crest Securities. Microsoft has to deal with the fact that Apple is making these really compelling devices.
Microsoft's move is the latest major win for ARM, which is making huge strides in mobile computing and on Wednesday also announced that graphics chipmaker Nvidia will begin designing central microprocessors for computers based on ARM architecture.
CORNERING THE MARKET
Microsoft's new approach marks a shift away from Intel, whose chips have held a hegemony on Windows operating systems on personal computers, and suggests the breakdown of the fabled Wintel alliance, which set the standard in early computing.
It's highly symbolic, the Wintel duopoly that was such a good partnership for so long is fraying at the edges a little bit, said Todd Lowenstein, a portfolio manager at HighMark Capital Management.
The U.S. software maker offered no time frame for the launch of the ARM-supported operating system version, but Windows unit chief Steven Sinofsky said Microsoft typically aims for 24 to 36 months between major Windows versions, suggesting a launch date of between October 2011 and October 2012.
That means tablets capable of taking on Apple's iPad may be a year or more in coming, running the risk of leaving it too late to catch up with Apple's iPad, and betting that tablets will be an enduring new market.
It's still early in the adoption phase for tablets, said Lowenstein. Prices will be coming down, there is a mass market opening up even more, and both Intel and Microsoft have the capability to catch up. Microsoft has made a business model out of second-mover advantage, using its scale to crush opponents.
Research firm Gartner expects worldwide smartphone sales to treble to 851 million units by 2014, while it sees tablets increasing seven-fold to more than 150 million units by 2013.
In comparison, PC sales are expected to increase at a much more sedate pace, close to 15 percent this year, rising to 610 million units worldwide by 2014, according to Gartner. By that time, Gartner expects tablets to have displaced about 10 percent of PC sales.
In his presentation Ballmer also pointed to the success of the company's new Kinect motion-sensing game system, which he said had sold more than 8 million units in its first two months on the market.
NEW CHIPSETS FOR WINDOWS
High-powered, low-battery chips made by ARM dominate the smartphone and tablet markets, and are featured for instance in Apple Inc's iPhone and iPad.
During Ballmer's presentation, he demonstrated a Windows desktop running off ARM-based chip architecture, including one powered by Qualcomm's popular Snapdragon processor and another by Texas Instrument's OMAP.
Also demonstrated was a desktop powered by Nvidia's Tegra.
Microsoft's operating software for mobile devices -- Phone 7 -- already supports ARM processors, but the new version of Windows would mark a shift in its core operating software for computing.
Samsung, Dell and Asustek have already announced that tablets running Windows 7 -- Microsoft's core product -- will go on sale this year.
They have to evolve the PC, they have to redefine the PC. And it looks like they kind of got the memo on this now, IDC analyst Hilwa said.
Shares of ARM rose 7.7 percent on the London Stock Exchange ahead of the announcement. Microsoft shares edged 0.3 percent lower to close at $28.
(Additional reporting by Alexei Oreskovic; Writing by Edwin Chan; Editing by Gary Hill and Steve Orlofsky)