When Web-linked information appliances abound, will the "Wintel" stocks fade?
In the heyday of the mainframe computer, IBM was the only tech company that mattered.
But with the rise of the personal computer, the baton--and vast revenue streams--passed to the so-called Wintel duo of Microsoft (with its Windows operating system) and Intel (with its microprocessor chips, now led by the Pentium line).
That sea change almost sank IBM in the early 1990s before it regrouped.
This year may come to be known for another sea change, as new Internet-access devices begin to challenge the PC.
The gadgets, often grouped together as "information appliances," range from 3Com's Palm hand-held organizer to Web-enabled cell phones, cable set-top boxes and products that are more like consumer electronics than computers.
If tech stocks are supposed to reflect where companies are going rather than where they've been, it's worth asking if the $600-billion-plus combined valuation assigned to Microsoft (ticker symbol: MSFT) and Intel (INTC) fully reflects the risks of a future in which many of us get our Net through devices that don't do Windows and don't have Intel inside.
Microsoft accounts for two-thirds of that stock wealth. It's more diversified than Intel, more insulated from the raging PC price war and has next to no manufacturing overhead. But information appliances pose a threat to both companies.
It's already clear that the allies aren't calling the shots here. They're being forced to compete for contracts--pitching their products in a fragmented market that has room for many operating systems and many microprocessors.
Eventually, the devices could siphon off PC revenue as consumers prefer their user-friendliness and specialized functions. In the bigger picture, appliances quicken the shift in key technology standards from the lucrative Windows-Pentium platform to the Internet itself, which is owned by no one.
"The Internet is becoming the uber-platform," said analyst Mark Specker of SoundView Technology Group. "There is no question that it will have a profound impact on current platform suppliers like Intel and Microsoft. . . . They will have to live with what they can't control."
Microsoft's agenda for extending its franchise to appliances revolves around its scaled-down operating system, Windows CE. That software now runs an estimated 25% of hand-held devices worldwide, versus 43% for 3Com's Palm OS. Britain's Psion and Japan's Sharp divide most of the rest.
In fact, the software titan is investing in gizmos across the board. It put Windows CE in the Clarion AutoPC, a voice-based system that receives wireless e-mail on the road. Upcoming Internet-linked cell phones from Matsushita will use CE, but Nokia, Ericsson and Motorola went with Psion.
On Monday, Microsoft made another thrust into Web phones, saying it will invest $600 million in wireless company Nextel Communications.
Microsoft's WebTV line, meanwhile, is far from a home run, but the company installs Windows CE in set-top boxes for cable giant TCI, now owned by AT&T. And as AT&T expands its cable business with the takeover of MediaOne Group, CE will be embedded in more boxes. However, that arrangement is nonexclusive, and Sun Microsystems, Sony and Network Computer also sell interactive-TV software.
Although Intel's primary chip for hand-held devices, the StrongARM, is widely admired, the Palm runs on a Motorola chip. Mips Technologies is entrenched in this niche, and National Semiconductor plans to flee the crushing PC market and concentrate on appliances.
Intel, meanwhile, has hinted at deals for set-top box chips but hasn't named its customers.
Appliances will be linked to servers, which have developed into a rich market for Wintel. Systems powered by Intel's Xeon chip running Microsoft's Windows NT are flying out the door. Yet they will never approach the volume of the desktop PC business.
And even here, Wintel is the challenger, not the champion. The Unix operating system, sold with servers from Sun, IBM, Hewlett-Packard and others, is holding its own, especially in larger networks too demanding for NT.
Nevertheless, Intel and Microsoft will pile up profits in this market. In the short term, says SoundView's Specker, the Microsoft story will only get better as the next release of NT, dubbed Windows 2000, roars into the market.
As for Intel, bullish analysts such as Stephen Dube of Wasserstein Perella and Ashok Kumar of Piper Jaffray point to Xeon's momentum and the upcoming Merced chip, which will power not only Windows NT servers but also Unix machines with no connection to Microsoft.
What of the bread-and-butter PC business? The debate about whether appliances will complement it or kill it is just beginning. Meanwhile, the PC industry forecasts 13% to 15% unit sales growth this year, with meager if any revenue growth as prices fall.