Microsoft (Nasdaq: MSFT) became dominant by shunning hardware and controlling the code that powered it. However, the winds of change are blowing, and the Redmond giant is belatedly starting to make moves. Five years ago, the idea of a Microsoft-designed processor would have sounded like lunacy. Then again, five years ago the idea of Intel buying a company specializing in security and anti-virus software would have sounded pretty outrageous, too. My, how things have changed.

Microsoft, no stranger to hardware
It's not that Microsoft hasn't been involved with hardware in the past. The company has long sold Microsoft-branded peripheral products like keyboards, mice, and joysticks. More importantly, Microsoft's foray into gaming gave the company experience designing hardware systems to go along with software.

In fact, the expertise Microsoft has acquired from designing the Xbox and Xbox 360 is underappreciated. Microsoft recently pulled the covers off the insides of its new slimmed-down Xbox 360, revealing an IBM (NYSE: IBM)-produced System-on-a-Chip (SoC) that beats AMD's Fusion chip to a high-powered design that puts the graphics and central processor on the same chip.

Long story short, the new Xbox 360 has some impressive engineering. What's important is that Microsoft's own engineers apparently were responsible for a lion's share of the complicated layout work.

A new path
Microsoft's growing expertise in hardware design comes at a time when its main rival, Apple (Nasdaq: AAPL), has had phenomenal success controlling both the hardware and software of the iPhone. While Google's (Nasdaq: GOOG) Android has seen remarkable growth by following a Microsoft-like strategy of forgoing hardware in favor of software distribution, that path is probably closed to Microsoft.

Google has built up a significantly larger installed base and collection of applications, and it has the support of most major hardware companies that don't have their own operating system. Also, Google gives its operating system away for free; Microsoft charges for licenses to its mobile operating system. In the face of all these threats and the diminished chances for profitability due to Google's "free" strategy and lead, it's no surprise Microsoft would look to shift closer to Apple's mobile game plan.

Microsoft has long explored the idea of adopting a strategy in line with Apple. There have been persistent rumors of a Zune phone, as well as reports of Microsoft being interested in purchasing Research In Motion (Nasdaq: RIMM), another company that melds its own mobile software and hardware.

Finally, there was the recent purchase of a "microarchitecture" license from Arm Holdings. The news was significant because what Microsoft purchased is a more expensive license that allows it to develop its own processor cores around Arm's technology. Can you think of another company that's loaded up on mobile processor engineering talent? Oh yes, Apple. It purchased both Intrinsity and P.A. Semi to beef up its ability to design processors of its own specification that could consume less power and perform better.

To the future!
Maybe Microsoft's logic behind buying the Arm-license is something out of left field. Microsoft has put particular emphasis behind Windows Phone 7's ability to sync with users' Xbox Live accounts and act as a powerful gaming device. Perhaps the license purchase is meant to create an enhanced processor design for gaming purposes.

However, the most obvious conclusion is the right one: Microsoft wants to get more involved with designing the hardware that melds with its software. If Microsoft had more expertise in this area, maybe its promising Courier concept could have hit store shelves sooner rather than stagnating within the company and eventually being cancelled. More importantly, it gives the impression that Microsoft is willing to push the envelope in finding a way to make its mobile operating system relevant again.

Hey, it's a long shot, but I'll take it over the status quo. The software Microsoft is dead -- long live the new Microsoft.

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Eric Bleeker owns shares of no companies listed above. Google, Intel, and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google. The Motley Fool has a disclosure policy.