Screwups and pesky competitors are challenging computerdom's most potent alliance.
By Brent Schlender

(FORTUNE Magazine) – 3

As IBM's jettisoning of its PC business in December reminds us, total dominance in IT can be ephemeral, even when you invent the most important commercial product in your industry. So the titans of Wintel are learning. While Microsoft and Intel are still growing and are both strikingly profitable, their hegemony has been fraying at the edges as the relentless march of technology has begun to outflank two near monopolies that once seemed impregnable--Microsoft's Windows operating system and Intel's Pentium microprocessor.

In part, that's because the full consequences of ubiquitous networking and the Internet are finally being felt. A profusion of devices and software services has sprouted from the web, vividly demonstrating to businesses and consumers that Wintel hardware and software are no longer the only way to go, or even necessarily the safest bets. Microsoft is locked in what has become a holy war with purveyors of open-source software that hope to make operating systems and standard applications like Office into low-cost commodities. Intel, meanwhile, finds itself playing catch-up with AMD, a scrappy rival one-tenth its size that seems to have a better sense of what PC and server buyers really want.

The dynamic duo's ebbing pre-eminence is partially their own fault. Though Microsoft dodged being broken up by the Department of Justice, it is still paying the price for that celebrated antitrust case. "Microsoft's reputation of being nasty and overly aggressive and not a good global citizen severely hurt the brand," says Mark Anderson, a longtime IT watcher and publisher of the Strategic News Service. "It could've been a cakewalk for them as the world moved to smart phones and interactive entertainment, but instead, repairing the damage will take years." Then there are Microsoft's problems in execution. Not only are its operating systems chronically prone to security problems, but it also can't seem to meet its own deadlines for developing products. And speaking of execution problems: Intel, which has always been an exemplar of tight management, stumbled repeatedly in 2004. It fell behind AMD in certain microprocessor markets and had to delay and even cancel high-profile chip projects it had touted as keys to future growth.

Neither company is in deep trouble per se. But both have steadily lost market share in recent years and have discovered that inventing sources of revenue and profit is no slam dunk. Microsoft spent billions trying to break into cellphones, make it big online, and work its way into the living room, but it hasn't a whole lot to show for those efforts. Intel has struggled to establish itself in communications and consumer electronics. Of course, the Windows and Pentium monopolies are tough acts to follow. Perhaps more important, however, the greater obstacle for Microsoft and Intel is the simple fact that as new digital platforms emerge, nobody else in IT or telecommunications or consumer electronics wants to see a rerun of what happened in PCs, a game in which two companies ended up hogging all the profits.

Even the Wintel alliance is showing signs of erosion. The partnership was always a marriage of convenience, and the companies often tangled behind closed doors. Now both are openly dallying with each other's chief rivals in ways no one could have imagined five years ago--Microsoft is working closely with AMD on both the high and low ends of the PC hardware market, and Intel is becoming a big proponent of the nemesis of Windows, the Linux operating system and other open-source software. Clearly, the best days of Wintel are behind us. -- Brent Schlender