Microsoft, Intel Face Their Kodak Moment

Just over a decade ago, Eastman Kodak faced a tough choice--continue milking its highly profitable but shrinking film business, or embrace the digital revolution, which back then was a niche but clearly the way of the future. Kodak chose wrong and ended up on a path that ultimately led it to its bankruptcy filing Thursday.

Intel and Microsoft now confront a similar dilemma. Will they learn from Kodak's mistakes and commit to painful but necessary change, or follow Kodak into decline?

Better than expected fourth quarter reports released Thursday can't hide the problem. Microsoft and Intel beat the Street's dumbed-down expectations, but their filings revealed that sales of products core to the once formidable Wintel alliance are under pressure as consumers and businesses embrace tablets and smartphones powered mostly by components made by younger, more agile rivals.

Windows sales were down 6% year-over-year. Intel's revenue from chips and related PC components was, surprisingly, up 17% compared to last year. But they were down 4% from the third quarter, despite the fact that Q4 includes the supposedly robust holiday shopping season. The numbers led analysts at Cannacord Genuity to keep a hold rating on INTC.

"We see PC demand remaining weak due to competition from tablets," Canaccord's Bobby Burleson noted in a report Friday.

The problem isn't that Intel and Microsoft's execs are blind to the industry's glaringly obvious trend toward mobility. It's that, like Kodak and its film business, they are addicted to squeezing every last dime of profit from legacy technologies, at the expense of true innovation. Microsoft has failed to produce a legitimate media tablet platform two years after Apple launched the iPad.

[ Learn more about the controversy and the compromises tablet manufacturers may have to make. Read Windows 8 Tablets Overpriced Thanks To Intel? ]

Windows is getting a makeover with Windows 8 to make it more tablet-friendly, but it's still Windows. And OEMs have spoken loud and clear: Windows is about the last OS they want running on their mobile hardware. Yet Microsoft CEO Steve Ballmer is undeterred.

"I'm glad we've got Windows," Ballmer said earlier this month at CES Las Vegas, where Microsoft made what it said would be its final appearance.

As for Intel, its mobile Atom chips are in a number of ways just a lite version of the x86 architecture, which on PCs still needs a windmill-sized fan just to keep from melting down. "They have taken some designs that were never meant for mobile phones and they've literally wrenched those designs and put them into a power-performance space which is roughly good enough for mobile phones," ARM CEO Warren East told Reuters.

He's obviously biased, but in this case that doesn't make his comments any less true. Sales of Atom chips were down an alarming 57% year-over-year in the fourth quarter.

Intel and Microsoft are hoping that so-called ultrabooks will bridge the gap between PCs and tablets until they can produce their own slates, but don't bet on it. Tablets demolished the netbook market and will likely impose a quick death on ultrabooks, especially given an average price of about $1,000. "Ultrabooks won't stimulate consumer demand until price points come down and touch is featured," said Canaccord's Burleson.

Which brings us back to Kodak. The company from the mid-90s was ruled by a succession of conservative CEOs who were loath to acknowledge digital technology's erosion of the film business. "Kodak was late to recognize the problem, slow to react, and then went down the wrong innovation path," noted BusinessWeek, in a 2006 story.

To ensure they don't end up on the same road, Intel and Microsoft need to embrace mobile and build new products from the ground up that are designed with portability in mind, first and foremost. If that means starting from scratch, so be it.

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