Microsoft Licenses ARM Architecture and Rocks the High Tech Industry

Microsoft (MSFT) apparently wants to literally duplicate the success Apple (AAPL) has seen in the mobile market so badly that it's about to fundamentally change its relationships with long-standing hardware partners. The company will license ARM Holding's (ARM) underlying semiconductor architecture, which will allow Microsoft to make its own microprocessors for devices.

It's hard to overstate how much of a sea change this represents in the computing industry. Microsoft's move is both the inevitable conclusion of the direction in which things have been moving and a desperate step by the software giant.

Don Clark at the Wall Street Journal seems to have broken the story, so kudos to him.

Most of ARM's licensees take complete designs for application processors--which run software in cellphones--often combining them with other circuitry, like baseband processors for managing cellphone radios. But Microsoft signed up for what ARM calls an "architectural license," a more comprehensive agreement that allows a company to take the underlying instructions used in ARM chips and create wholly original designs.

Analysts believe Apple holds the same kind of license, though neither Apple or ARM will discuss the matter. The only chip makers that have said they hold architectural licenses are Qualcomm Inc., Marvell Technology Group Ltd. and Infineon Technologies AG.

The real problem for Microsoft is that long-standing hardware vendor partners are testing other waters in a serious way. HP has said "Adios!" when it comes to mobile, as it will base products on Palm's webOS. Dell (DELL) has already released Android-based hardware and will work on others. Rumors suggest that Acer plans Android entries as well.

For a long time, Microsoft's revenue and earnings could rest comfortably on the virtual lock-out it had created for other operating system vendors. However, hardware manufacturers are pragmatic and see how the business environment has changed. Steve Ballmer and his management team cannot depend on loyalty, especially as Google, in particular, generates more interest.

Part of the wandering eye is cost. Android is free for manufacturers, unlike versions of Window. Google can do that because its advertising revenue subsidizes development. Microsoft, on the other hand, must make money from operating system sales. If vendors get skittish, the company must find another path to market.

Not that Microsoft is a stranger to hardware. It has sold higher-end keyboards and mice for years, to say nothing of the Xbox line of gaming consoles. But even for the Xbox, as well as the here-today-gone-tomorrow Kin social networking phone, the company got microprocessors from others.

Microsoft is in a dangerous game. The plus side? Produce highly optimized chips that will power handsets and tablets and potentially regain market share among mobile devices.

However, the down side is steep. Microsoft will further alienate hardware vendors by releasing its own line of handsets and mobile computers, to say nothing of Intel (INTC). Microsoft also has had spotty success in addressing consumer hardware markets. No matter what it does, the cloud of uncool hovers over its head. So the gamble may be for naught.

Related:

• Microsoft Earnings: Gliding on Windows and Not Much Else
• Early Windows Phone 7 Reviews: Good, but Not Good Enough
• Microsoft Has Windows 7 Tablet Dreams, XP Nightmares
• PC Vendors Pray iPads Don't Cannibalize Mac Sales; Microsoft Hopes They Do
• Microsoft Kills the Kin and Won't Learn Anything Useful from It