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 company, 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.

The 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.

Microsoft's action is a shift from its alliance with Intel, whose chips have been the mainstay of Windows operating systems on personal computers.

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 disappearance from the phone market and its delayed response to tablet devices like the iPad weighed on its shares in 2010.

Investors want to know how the software giant intends to establish a strong presence in the exploding tablet market and catch up with Apple's iPhone and Google's Android smartphone systems.

This is an existential issue for Microsoft in terms of its relevance, said IDC analyst Al Hilwa, calling the smartphone a fundamental challenge to personal computers. It has more technology, more devices, it's actually smarter, more aware of its location and of its proximity to me, than my PC is, he said.

It's something essential for Microsoft.


Microsoft's new approach marks the end of Intel's hegemony on Windows systems, sometimes referred to as Wintel, 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 had no time frame in mind for the launch of the ARM-supported operating system version, Windows division chief Steven Sinofsky told reporters at the Consumer Electronics Show.

But the executive added that 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.

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.

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.

At the Consumer Electronics Show in Las Vegas, executives 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.

It may be the end of the PC as we know it. In a way, it's a recognition that the new PC has to look different, so Microsoft has to be at the forefront of evolving it, IDC analyst Hilwa said.

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.

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)