A year of transition for Microsoft and Intel

January 20, 2012: 10:06 AM ET

Intel and Microsoft helped usher in the era of personal computers. Now the two companies are reinventing themselves in an industry where PCs are no longer the primary driver of innovation and growth.

FORTUNE -- Both Microsoft and Intel are still money-making machines--they raked in $20.9 billion and $13.9 billion, respectively, in quarterly earnings announced on Wednesday. But their core businesses are increasingly under threat because they're largely dependent on demand for desktops and laptops. According to recent numbers from research firm Gartner, global PC shipments declined 1.4% in the last quarter of 2011. As more and more people use smartphones and tablets as their primary access to the Internet, that trend isn't likely to change (even after the industry recovers from the effects of the flooding in Thailand and financial shakiness in Europe).

"While economic uncertainty in Western Europe had an effect on consumer PC shipments, expectations of a healthier economic outlook in North America could not stimulate consumer PC demand in that region," Mikako Kitagawa, principal analyst at Gartner, wrote in a recent release. "The healthy professional PC market as well as growth in emerging markets could not compensate for the weaknesses in mature markets, with overall growth still negative."

Of course, Microsoft (MSFT) and Intel (INTC) aren't sitting still. This year, you'll see both companies make an aggressive push into fast-growing businesses like smartphones, tablets and the cloud. Microsoft is expected to launch its tablet-optimized, touch-centric Windows 8 operating system in late February, and will continue to push cloud-based services like Office 365 into the market to compete with the likes of Google (GOOG). As for Intel, earlier this month the chipmaker announced that a phone powered by its Medfield processor would finally come to market in China, and more devices are expected to be unveiled in the coming months.

So will they succeed? Microsoft's Windows 8 is a step in the right direction, and a prototype phone running on Intel's Medfield processor has gotten good performance reviews. But technology prowess alone won't win the game--in the post-PC era, it's all about ecosystems. That means both companies will need to get manufacturers, carriers, developers and ultimately consumers to jump on board.

To be sure, there are also plenty of bright spots in Microsoft and Intel's current businesses. While Microsoft's Windows business was down from last year, its Xbox unit posted sales of $4.24 billion, topping analysts' projection of $4.2 billion. And, largely due to sales in emerging markets, Intel's PC business is still growing--it rose 17% year-over-year.

"Emerging markets now account for two out of every three incremental units of PC demand, a shift that is rewarding Intel and the PC companies that have a long-standing, deep presence in these markets," Intel CEO Paul Otellini said in a press release issued on Wednesday.

But the coming year will be one of major transitions for the powerhouses formerly known as WinTel. Even if we're not living in a post-PC era quite yet, the shift to mobile devices--not to mention the shift from on-premise to cloud-based software--is happening much faster than either company was prepared for. So it's clear that, despite both companies' impressive quarterly numbers, their long-term success relies on their ability to change along with the rest of the industry.

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Michal Lev-Ram
Michal Lev-Ram
Writer, Fortune

Based in Silicon Valley, Michal Lev-Ram covers enterprise and mobile technologies for FORTUNE. Prior to joining FORTUNE, she wrote for CNNMoney, Fast Company, Popular Science and other business and technology publications. She was also a staff writer at Business 2.0 and holds a B.A. in journalism from San Francisco State University.

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