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Microsoft And Intel: Moving In On Pc Makers' Turf

News: Analysis & Commentary: Technology

Microsoft and Intel: Moving in on PC Makers' Turf

How deeply will they delve into developing Net appliances?

For years, personal computer makers have cheered whenever their biggest suppliers, Intel Corp. and Microsoft Corp., have hawked new processors or software at industry trade shows. But they aren't likely to coo about what those companies will introduce at this year's Consumer Electronics Show on Jan. 5 and Jan. 6.

Rather than unveil new goodies for PCs, the two will preview computer-like appliances that could siphon consumer dollars spent on PCs. The moves could also cut off promising new markets for PC makers. Intel will reveal a digital music player, while Microsoft will show off its much anticipated Xbox game console.

The introductions could kick off a more troubled era between PC makers and the chip and software kingpins. Although the Wintel duo has dabbled in selling hardware such as mice and home-networking gear to consumers, this is the first time it will go head-to-head with PC makers in markets with sizable potential. "You're going to step on a lot of toes when you start competing for the same consumer dollars as your customers," observes IDC analyst Bob O'Donnell.

The assault couldn't come at a worse time for PC makers. Partly because of market saturation, computer sales are expected to slow dramatically in 2001. Furthermore, electronic appliance makers such as Palm Inc. and Nintendo have been busy picking off niche PC functions like personal organizers, photography, music players, and games. Analysts now expect sales of non-PC devices to grow at least 40% through 2004, versus mid-teen growth for PCs.

PC makers have remained mostly mum about the moves for fear of crossing their most critical suppliers, but many are trying to protect their turf. Some are building new relationships with Intel chip rivals Transmeta Corp. and Advanced Micro Devices Inc. Other companies using Microsoft's operating system are moving to rival Linux for forthcoming products. Small as these efforts are, PC makers want to be prepared with new suppliers if their old ones become significant competitors.

Intel and Microsoft are already at their door. Intel's $299 digital music player, to be launched February 1st, will go up against Compaq Computer Corp.'s $249 iPaq MP3 player. In the fall, it will start shipping its Web Tablet and Chat Pad wireless-handheld computers that work in conjunction with desktop PCs. Both will compete with similar offerings from Compaq and Gateway Inc.

Why is Intel willing to forge ahead? 80% of its core business comes from selling chips to the slowing PC market. Now, they are looking to make up for the slump by creating new products that make use of existing Intel components.EYE-POPPING GRAPHICS. Some PC makers also see a major threat in Microsoft's powerful Xbox, which features a Pentium III processor and graphics far more stunning than that of the average PC, still heavily used by gamers. One PC industry exec argues consumers will be far more likely to buy the Xbox for $300 than a $700 computer. "I don't think most PC makers understand what's going on," he says of the potential threat from Microsoft.

Of course, it's far from certain whether Microsoft and Intel will be successful. Neither has much experience competing against long-established electronics suppliers such as Sony and Panasonic, much less Compaq and Gateway. But both have spent billions on brand recognition, and analysts say their new offerings are technologically superior. Intel's music player has twice the recording capability of competitors at a similar price. The Xbox, for its part, will include a high-powered DVD player and a hard drive that allows for better streaming video and audio than on PCs and competing game consoles.

Intel and Microsoft have other advantages. The former controls more than 25% of the red-hot flash memory market that is key to several of its new devices. And Microsoft has attracted major game developers such as Electronic Arts and Activision Inc. That's upping concern elsewhere in the industry. "The question on everyone's lips is, at what point do they stop?" says IDC's O'Donnell. "It's not much of a step to see an Intel-branded computer." If that happens, you can bet PC makers will only be chillier at future electronics shows.By Cliff Edwards in San Francisco, with Peter Burrows in San Mateo and Jay Greene in Seattle

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