MAKE NO MISTAKE, the top brass at AMD and Intel are going to need to live by Andy Groves' famous "only the paranoid survive" counsel. The two firms, along with VIA and Transmeta, are facing the biggest threat to their processor businesses ever: Microsoft is moving in. The announcement that Microsoft has chosen IBM to make a processor for Xbox 2 should be sending shivers down the spines of the execs of every x86 chip firm. Just about every newswire has concentrated on trying to figure out what type of chip is going to be used in the Xbox 2. Will it be a PowerPC derivative? A licensed version of AMD64? A modified Cell processor? It really only matters to gamers exactly which chip Microsoft has chosen, everyone is looking at the finger when it's pointing to the moon.

All of the x86 firms, but especially Intel and AMD, are going to have to be on their guard. If Microsoft gets one piece of intellectual property into the next generation of x86 processors, you can bet that it won't be satisfied with just that. It will want to maximise its license revenues and that means getting more licenses in there. Oh, the first one will seem trivial, perhaps it will even be free of charge, but Microsoft doesn't play softball. Sooner or later the x86 firms would find a hefty percentage of their gross margin heading Redmond way. Microsoft is very smart indeed and it has become used to getting its 'tax' on pretty much every PC sold. The firm will be looking at this and similar techniques as an insurance policy; it has seen the spread of Linux and knows its revenue stream is under threat, if it has a stake in every x86 processor sold, Linux gaining ground won't matter so much.

All in all, this is classic Microsoft. And if the x86 firms' execs weren't sweating before they read this, they certainly should have been. The biggest problem they face is how to stop it from happening because Microsoft will make its arguments very persuasive.