On Tuesday, a monumental piece of news leaked out from the technology world, and in response, people merely sighed. The news amounts to nothing less than the final piece of the puzzle needed to shatter "Wintel," the combination of Microsoft (Nasdaq: MSFT) Windows operating systems and Intel (Nasdaq: INTC) processors that came to define the PC era of computers.

The seeds of Wintel destruction
Weeks ago, a colleague had e-mailed me asking my opinions on Intel. Much like other tech heavies, the stock looks downright cheap. Intel is a cash machine, spinning off more than $10 billion a year in free cash flow. The company also maintains nearly $21 billion in cash sitting ready on its balance sheet.

Intel's value is largely impaired thanks to investor fears over tablets and smartphones, an area in which the company isn't currently competitive. But investors who believe the near-term threat from these devices is exaggerated are largely correct. Smartphones and tablets combine to make a pretty big wave, but they're mainly hitting netbooks. However, Intel wasn't getting stellar revenues from its Atom line that's found in netbooks to begin with, so this loss is overblown. Add on strength in businesses refreshing PCs and servers, and Intel should be fine in the short run.

However, things do look a bit more ominous in the long term. I told my colleague to be on the lookout for the shattering of Wintel, which could happen if Microsoft announced a version of Windows that's compatible with the ARM architecture championed by ARM Holdings (Nasdaq: ARMH).

Why Wintel matters
People might be familiar with the term "Wintel" but unfamiliar with the implications of the term and the way it has enabled Intel's near-monopoly dominance. Essentially, consumer versions of Windows, the dominant operating system of this generation, have worked only on x86 processors, the architecture championed by Intel. The term initially referred to systems bundling Intel processors and the Microsoft operating system, but today it also includes processors from Advanced Micro Devices (NYSE: AMD), which are also based on Intel's x86 architecture.

This "Wintel" combination has largely held up through the last generation of computing. It has left Intel as the titan of semiconductors while smaller firms engaged in pricing bloodbaths and brutal cyclical booms and busts that left their value in the gutters. However, Wintel now faces its greatest threat.

Meet ARM, bringer of death
On Tuesday, reports from Bloomberg leaked out that Microsoft was developing a version of Windows for ARM-based processors. That means that instead of just working on smartphones and tablets, ARM processors can now be put in everyday laptops running Windows. That opens up a whole segment of consumer spending for ARM-based processors.

The news was met with minimal fanfare; it's long been known that Intel and ARM were gunning for one another. However, investors failed to realize the broader implication of this move. Since ARM took a dominant market share in the mobile space, the question has been whether Intel could encroach on ARM's space. Till now, we've seen Intel on the offensive with ARM preparing to defend itself -- but now, thanks to Microsoft, ARM has a beachhead on the PCs we use in our everyday life. ARM is officially on the offensive.

ARM: more than meets the eye
This news is apt to be shrugged off. People will point out that the power of Intel's chips are vastly superior to ARM processors and that ARM's simply too underpowered for the needs of modern computer users. However, that line of thinking should be proved wrong for a couple reasons.

  1. Users no longer place the same premium on horsepower: Some of the hottest computing trends of the past year feature systems that were initially panned as "underpowered." Given the trade-off between having a slightly underpowered laptop and vastly superior battery life, today's computer user may be more inclined to take the option with better battery life.  Also, although ARM might be behind today, it's quickly bridging the performance gap to a level that would prove acceptable in today's laptops.
  2. ARM features a powerful alliance backing it: ARM doesn't actually produce the processors seen in your phone; rather, it licenses the technology behind them. Instead, companies such as Qualcomm (Nasdaq: QCOM), Apple (Nasdaq: AAPL), Marvell, Texas Instruments, Samsung, and NVIDIA (Nasdaq: NVDA) have placed large amounts of investment behind the architecture. Thanks to its inability to crack the mobile world, Intel has allowed a powerful grouping of companies allied behind its rival technology to emerge.

This shift should come sooner than users expect. The example of Intel's relationship with Apple proves especially illustrative in this respect.

Thanks in part to a dispute where Intel has been bullying NVIDIA around, Apple has continued to use ancient Core 2 Duo processors on its Macbook Air line. That's an old processor that should have long ago been replaced, yet in spite of this limitation, the Macbook Air is wildly popular.

What does that foretell? As we shift to a cloud-based world where most of our computer usage is browser-based, people care less and less about the processor! With Apple pouring hundreds of millions into developing its ARM-based A4 processor, what's to stop that company from programming a new version of OS X to run on ARM-based processors and later releasing a Macbook Air using its own A4 processor? Within a few Macbook refreshes, Intel could find itself in serious trouble.

The bottom line
Intel is facing what I believe to be its greatest challenge yet. With Wintel shattering, Microsoft comes out comparatively better. Users will still want the operating system they're used to, but they have less incentive for loyalty toward the unseen processor powering their computer. If competition is open to a vast array of companies producing cheap processors for Windows thanks to its new ARM-enabled version, that hurts Intel's pricing power at the very least. Intel's long-standing competitive advantage of being the leader in the only architecture for Windows is destroyed. Make no mistake: Prices will fall.

When in three years you look at your next laptop and you see a sticker that reads "Qualcomm Inside," rest assured that the seeds for that shift were planted this week.

A huge opportunity awaits the companies producing ARM-based chips, and a dangerous future that's not fully appreciated by many investors awaits Intel. My recommendation on how to invest in this news shouldn't come as a surprise.

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Eric Bleeker owns shares of no companies listed above. Intel and Microsoft are Motley Fool Inside Value choices. Apple and NVIDIA are Motley Fool Stock Advisor recommendations. The Fool owns shares of and has bought calls 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 Apple, Microsoft, Texas Instruments, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.