The prompt shift to low-cost mobile computing has taken Microsoft (NASDAQ:MSFT) and Intel (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 and Intel are Google (NASDAQ:GOOGL) and ARM Holdings (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 to charge the hefty software licensing fees that it's accustomed to, all because Google 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 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's broad ecosystem of licensee chipmakers such as Qualcomm and NVIDIA, ARM chips have always been far cheaper than Intel'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'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-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's disruptive approach with Android gives OEMs a cheaper alternative operating system, while competition within the ARM ecosystem removes Intel'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.
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. 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.