Intel and AMD face nastiest competitor of all

MAKE NO MISTAKE, the top brass at AMD and Intel are going to need to live by Andy Groves' famous "only the paranoid survive" counsel. The two firms, along with VIA and Transmeta, are facing the biggest threat to their processor businesses ever: Microsoft is moving in.

The announcement that Microsoft has chosen IBM to make a processor for Xbox 2 should be sending shivers down the spines of the execs of every x86 chip firm. Just about every newswire has concentrated on trying to figure out what type of chip is going to be used in the Xbox 2. Will it be a PowerPC derivative? A licensed version of AMD64? A modified Cell processor? It really only matters to gamers exactly which chip Microsoft has chosen, everyone is looking at the finger when it's pointing to the moon.

The Great Licensing Game
Microsoft has a strategic capability that outshines just about any other company out there, it is almost certainly the smartest operator on the planet and, therefore, the most dangerous to anyone in its sphere of influence. One of the firm's key strategies at the moment is licensing technology.

As has been written here before at the INQUIRER, Microsoft wants a piece of every pie, not just the operating system and applications market, and it sees licensing as the way to achieve that. The most obvious example that's out in the open was Microsoft's attempt to snatch all of the patents relating to DirectX 9. If it had managed to do that, it would effectively have had entire control over who could produce fully compatible graphics chips for PCs.

But graphics are only one part of the equation and the majority of graphics chips sold are a small proportion of a PC's price. Processors are usually the most expensive component used and all the signals are there to show that Microsoft will try to grab a slice of that pie.

The Road to Riches
It seems like an impossibility, there are already processors from Intel, AMD, VIA and Transmeta that perform just fine. The most obvious way is for Microsoft to develop a nice addition to a processor, but persuading those firms to adopt Microsoft intellectual property for no reason other than Microsoft's say so would be nearly impossible. They will smell a rat straight away. What it really needs is some form of irresistible carrot to wave in front of them or stick to beat them with.

So, if Microsoft can't persuade the x86 firms to adopt some of its intellectual property voluntarily, there's one obvious route: Microsoft needs to build its own processor. Enter the processor for the Xbox 2, it gives the firm the perfect place to try out potential technology to license.

Twisting the Arms
Just having the technology by itself won't be enough, what the firm needs is something that will really persuade the x86 firms to start doling out money to Microsoft to use it. The obvious answer is that Xbox 2 is likely to use a cut down version of Longhorn, Microsoft's next version of Windows. If there are several components in Longhorn that use the new technology and show a definite performance improvement because of it, the firm has a good carrot to work with.

But that still might not be enough. The next stage would be to tactically play AMD and Intel off each other. AMD is desperate to catch up with, if not overtake Intel, and would make the perfect target for Microsoft to get its initial sale. AMD would be far more open than Intel to something that might give it an extra edge, even if it had to sell its soul to get the technology.

You might think that if Intel doesn't adopt it, that would be enough to knock the idea on its head but that's not so. By the time this technology is ready to go, Intel will be under incredible pressure from AMD64 processors. The firm is already showing signs that it is creaking under the strain, if AMD had both 64bit x86 processors and some new technology from Microsoft, it could make the pressure unbearable. Intel might have to adopt it almost by default.

Conclusion
All of the x86 firms, but especially Intel and AMD, are going to have to be on their guard. If Microsoft gets one piece of intellectual property into the next generation of x86 processors, you can bet that it won't be satisfied with just that. It will want to maximise its license revenues and that means getting more licenses in there. Oh, the first one will seem trivial, perhaps it will even be free of charge, but Microsoft doesn't play softball. Sooner or later the x86 firms would find a hefty percentage of their gross margin heading Redmond way.

Microsoft is very smart indeed and it has become used to getting its 'tax' on pretty much every PC sold. The firm will be looking at this and similar techniques as an insurance policy; it has seen the spread of Linux and knows its revenue stream is under threat, if it has a stake in every x86 processor sold, Linux gaining ground won't matter so much.

All in all, this is classic Microsoft. And if the x86 firms' execs weren't sweating before they read this, they certainly should have been. The biggest problem they face is how to stop it from happening because Microsoft will make its arguments very persuasive. µ

See Also
Microsoft to design chips for Xbox2 Eva Glass in March 2002. Sheesh!
Microsoft's move into CPU, chipset market
Microsoft enters semi business