Wintel Hegemony Is Dead
Erick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Wintel hegemony refers to the monopoly created by IBM (NYSE: IBM) when it gave its personal computing (PC) business guts to Intel (NASDAQ: INTC) and Microsoft (NASDAQ: MSFT). Since those heady days of the 1980s and 1990s, IBM has mostly (and very wisely I might add) abandoned the Original Equipment Manufacturer (OEM) business in favor of concentrating on services and cloud computing. Intel, of course, manufactured the guts of the hardware, the microprocessors, while Microsoft concentrated on the software side, primarily the Operating System (OS) and the Office productivity suite. Both Microsoft and Intel still generate lots of free cash flow from their respective businesses, but over the last few years the trends have been very clear -- these businesses have been in decline.
These trends include the introduction of smartphones, tablets, social networking and cloud computing. At the center of this revolution are four companies: Apple (NASDAQ: AAPL), Google, Amazon and Facebook (NASDAQ: FB). The old guard is represented by Wintel and the OEMs, and the new guard by these four tech giants.
The new guard companies are not afraid to delve into each others' core businesses and compete fiercely. The old guard got fat and happy by sticking to their markets for the most part and just collecting the royalties from past achievements, and the news for the old guard companies has just gotten worse and worse over the last few months.
This last week has featured disastrous earnings announcements from such previous darlings like Hewlett-Packard and Dell. Both OEMs face declining revenues and earnings from their core PC markets and an ever increasing doubt that they can ever break into the fastest growing areas of technology.
We have also seen management shakeups at Microsoft and Intel recently. The answer that management has been applying to their problems is to trim their workforce, and their investment into R&D has been ineffective at best compared to the new guard companies.
Take Apple as an example. Their R&D budget is modest for a company of their size, but their innovations have been legion over the past 5-10 years. Even failed experiments, like Newton, Apple TV and Ping, are likely to be recycled into learning experiences that can be used to enhance the user experience in the future. It is telling that the only somewhat-healthy PC business these days are iMacs and MacBook Pros and Airs.
Let's not even mention Google, because they are all about R&D and the real payoff with them is likely to be seen 10-20 years down the road when we are all sitting in Google driverless cars while immersed in our Google 3D super HDTV holographic supercomputing cloud-based goggles.
Let me briefly conduct the SWOT analysis for the Wintel hegemony:
- Good balance sheets for Microsoft and Intel with manageable debt levels and consistent (if not soon declining) cash flow.
- Solid core businesses with Windows, X-Box, and Office for Microsoft. Solid businesses for Intel on the Server and Cloud Computing side with some good growth expected.
- Nice dividend yields that are sustainable for years to come.
- Solid R&D and engineering staff. Management is generally competent but of late has not effectively moved into the higher growth areas. Microsoft's Surface tablet and Windows 8 gamble looks to at best to have had only mixed reviews and may only just keep it treading water.
- Dependance on dying OEMs.
- Fierce competition from the new guard.
- Declining revenues from core businesses.
In order to avoid the death spiral they need to innovate effectively and do it soon!
- Cloud computing and mobile have to be the future for both Microsoft and Intel.
- Intel must continue to lower power consumption and increase the computing power in their chips faster than the competition. Quantum computing and manipulation at the atomic level offer wide open fields. Intel has already innovated by adding three dimensional chip manufacturing capabilities, but now they have to prove they can do it on a massive scale.
- If Intel can get their chips into Apple mobile products then that would be a major coup.
- Microsoft needs to keep refining Windows 8 and needs to lower their price points in order to compete effectively with all the Android clone tablets out there in the sub-$200 space. The competition there is getting very cutthroat with Kindle Fire leading the charge since Amazon is willing to sell at a loss in order to suck you into their ecosystem. The new frontier is to lower the price point enough to achieve wide penetration in emerging markets.
- It's all about the ecosystem, baby. Apple is the king of the ecosystem with Google nipping at its heels and Amazon following closely behind. Apple has done a beautiful job of integrating social networking into its iOS and OS X with Facebook and Twitter getting easier and easier to use. Amazon's third in terms of its ecosystem, but it is catching up quickly by adding content at a furious pace.
- Apple does have an ace in the hole though which is its relationship with Disney by virtue of its acquisition of Pixar. Disney just shut down its online store and I wouldn't be surprised if it reappeared in iTunes soon.
- The new guard wants to be your provider of choice for all content, and in this respect Apple has a clear lead due to the sheer number of developers putting out apps for them (note that Apple collects 30% of those sales). Android though is not far behind on apps, but I think that Apple has the best prospects going forward in the next 2-3 years.
To summarize, Wintel is essentially dying a death of a thousand cuts, but they are putting on a brave fight against overwhelming odds. I have invested in Intel as a value play, but will reevaluate that investment over the next 6-12 months. Microsoft, on the other hand, played its hand and it does not seem to be a great one right now as Windows 8 and Surface may only yield modest success, and not the revolutionary innovation that drives consumer demand. Stay tuned since 2013 will be the real pivot point for both of these companies.
Fool blogger Erick M. Santos, M.D., Ph.D. (aka xerohype) owns shares in AAPL, INTC, GOOG, MSFT and AMZN. The Motley Fool owns shares of Apple, Amazon.com, Walt Disney, Facebook, Google, International Business Machines, Intel, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Amazon.com, Dell, Walt Disney, Facebook, Google, International Business Machines, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!