Et Tu, Intel? Microsoft's Ambitions Lie Bleeding

(MoneyWatch)  Intel's new operating system, designed for cloud-computing devices like smartphones and netbooks, is a potentially fatal stab wound to Microsoft's operating system empire.

This is a critical juncture for Microsoft, which is trying to catch up with competitors like Salesforce.com, Google, VMware and other vendors delivering applications and processing power over the Internet, without disrupting its traditional revenue streams. Windows, the foundation on which the rest of its business is built, represents a significant portion of that revenue stream, but has also been the millstone keeping Microsoft grounded and off the cloud. Microsoft has hoped to make a smooth transition to a market dominated by cloud-based computing systems like netbooks and smartphones -- at the expense of traditional PCs and laptops -- on the coattails of Windows 7, which it expects to ship later this year. But Moblin, Intel's new operating system, is truly built for the cloud and can take full advantage of Intel's processing power in a way that no other company, no matter closely it works with the chip maker, can duplicate.

Intel's decision to develop Moblin was clearly driven by the success of smartphones and netbooks, both of which rely on the cloud to do most of the processing and storage that traditional PCs perform on the device itself. Microsoft has tried to float the idea that it will survive the obsolescence of traditional PCs and laptops because of the largely spurious idea that Windows 7 is optimized for netbooks. Yes, unlike Vista, hardware vendors won't have to disable many key features of Windows 7 for it to run on their devices, but Windows 7 is still an operating system built for another era.

Steve Ballmer hasn't missed an opportunity to talk about the Windows "attach rates" for netbooks -- more than ninety percent of netbooks shipped through 2008 ran on Windows -- but those attach rates occurred before netbook vendors had any real alternatives. Now it has not only Moblin, but also Google's Android operating system to contend with.

Ray Ozzie, Microsoft's chief software architect, admitted today during a presentation at a J.P. Morgan technology conference, that the technology world is at "an inflection point," with many applications moving to a cloud-based delivery model. But he insisted that Microsoft is sheltered from the storm of change because it remains itself a safe haven for "pragmatic" customers. Not everything is shifting to the cloud, he argued, adding that while some of Microsoft's competitors have experience handling the huge surges in demand put on servers by consumers, and others understand enterprise requirements, none have Microsoft's experience in both worlds.

But Microsoft is nonetheless relying on an installed base of IT administrators and their predictable reactions to upgrade cycles -- which is to attend its conferences and then purchase more licenses. But the sands are shifting under Microsoft's feet, buying decisions are being put off, and a new generation of IT administrators, intimately familiar and comfortable with Internet-based computing, is arriving.

Microsoft needs its friends now more than ever, so the fact that this blow comes from its former Wintel doppleganger makes it even more difficult to bear. When Ozzie was asked about Moblin by one of the J.P. Morgan analysts, he tried to downplay the betrayal, saying Microsoft works very closely with Intel. But a blow it is, no matter how Ozzie spins it. Furthermore, Intel will have a co-conspirator that is no stranger to Microsoft, and bears it little love -- Novell, which was nearly driven out of business by Microsoft Windows Server, and which will delight in helping Intel sell into markets where it has little experience.