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Apple’s Chief Executive Steve Jobs confirmed at the company’s Worldwide Developer Conference in San Francisco what had been rumored for weeks: Apple is walking out on its 14-year microprocessor sourcing relationship with IBM in favor of semiconductor titan Intel.

The relationship with IBM went back to 1991 when Apple Computer Inc. agreed to transition its product line from a Motorola 680000 microprocessor platform to IBM’s PowerPC central processing unit, which in 1994 powered the first PowerMacs.

Now Apple is embarking on another major platform conversion, expected to result in Mac Minis based on Intel Corp. products by June 2006 and similarly Intel-based PowerMacs by December 2007.

So why is Apple doing this now and what does it mean to consumers, Apple software developers, the channel and the companies involved?

The reason Apple is taking this major short-term risk is that it got fed up with IBM’s inability to consistently deliver PowerPC parts on time, at a competitive price and at the performance level required by the market.

For example, IBM has failed to deliver the high-performance 3 GHZ PowerMac chips it promised two years ago.

Similarly, on the notebook side of the product line, IBM has been unable to ship low-power G5-based (PowerPC 970) microprocessors, putting Apple at a competitive disadvantage in a segment that generates about 50 percent of Mac revenues.

For Apple, the short-term risks of this move are significant. Transitions are difficult and there is likely to be ISV pushback, particularly since Apple just finished forcing ISVs to recompile a lot of their code for the changeover from OS 9 to OS X four years ago.

Consequently, software compatibility glitches during the transition could be a problem. As with any transition, lack of operational focus and a loss of momentum on the current PowerPC-based products is also a risk.

Click here to read about Adobe’s support of Apple’s switch to Intel processors.

Finally, there is always the potential to alienate loyal Mac users who have viewed Intel as being aligned with the “Dark Side” of the computing force. Again, why shift to Intel now, and what is the potential payoff?

In my opinion, the long-term benefits outweigh the risks involved. Apple will align itself with the world leader in semiconductors, thus assuring itself of a consistent microprocessor supply source.

Secondly, by using Intel microprocessors, Apple should receive lower-cost parts and a product performance roadmap at least as good as that of Dell Inc. The key differentiator here for Apple will continue to be its control of the tight integration of its operating system software and hardware.

Finally, there is a potential for lowering prices and increasing Apple’s paltry worldwide market share of 2.3 percent (4.5 million units out of 195 million personal computers forecasted to ship in 2005).

If that happens to any meaningful degree, Apple may be able to attract more developers to its platform, which would generate more applications and motivate consumers to buy more Apple products, completing the positive cycle.

Therefore, consumers could be big winners as Apple shifts to the Intel Platform. They should get lower prices, better performance and faster product cycles from Apple. The negative will be the certain compatibility problems in terms of applications and device drivers. But these should be short-lived.

For developers, including Apple, there will be a need to spend more research and development dollars on porting, recompiling and transitioning applications to the Intel platform. The payoff could be in writing to a higher-volume platform.

As far as the channel is concerned, it will be critical to tightly manage inventories of current and new product throughout 2006 and 2007 as the transition unfolds. There is bound to be some confusion and a need for higher service levels, and that could open opportunities to the channel.

Read details here about how developers are reacting to Apple’s decision to move from IBM to Intel chips.

Longer term, Apple will have an opportunity to expand its markets as its products deliver more performance and achieve higher levels of competitiveness. This may allow Apple to have a credible presence in the enterprise market, perhaps utilizing its channel partners. Nevertheless, Apple has a lot of fence-mending to do with the VAR/VAD (value-added dealer) channel in this regard, given its less-than-stellar history.

For IBM, losing Apple as a customer is not a meaningful financial hit. But it does hurt IBM’s prestige to lose such a high-profile, long-standing relationship.

This is true even though IBM has won big contracts from Microsoft Corp., Sony Corp. and Nintendo of America Inc. to supply microprocessors for the Xbox 360, the PlayStation III and the Revolution game system, respectively.

The loss of Apple means a 10-15 percent reduction in IBM’s semiconductor revenues coming through its Microelectronics unit, or less than 0.5 percent of total IBM revenues. IBM’s merchant semiconductor revenue is about $550 million per quarter and the PowerPC for Apple constitutes about $60 to $90 million per quarter, assuming IBM sells each microprocessor to Apple for about $150 a piece.

The real value to IBM of its PowerPC sales to Apple was that it helped amortize the research and development cost of the Power microprocessor line. IBM uses these microprocessors in its pSeries and iSeries server line.

As far as Intel is concerned, winning the Apple account is the culmination of more than a decade of courtship. It is satisfying for Intel to partner with Apple not just in the personal computer arena but perhaps also in the consumer electronics digital revolution.

Financially, convincing Apple to use Intel microprocessors has a small impact on its bottom line. Apple should add perhaps 2 percent to Intel’s sales by the fourth quarter of 2007, and perhaps a penny to a nickel per share to its bottom line in 2007.

The bottom line to Apple’s move away from IBM to Intel is that they probably should have made this move a long time ago. Nevertheless, now is a propitious time to embark on this formidable transition, given the success of the iPod, which accounts for about 33 percent of Apple’s revenue and will buffer the company’s top line from potential missteps.

Benny Lorenzo has more than 30 years of business and technology experience and is currently General Partner at Aspira Capital Management of Fort Lee, N.J. He has held various positions with AT&T and IBM. He was also portfolio manager at P.A.W. Partners and served as senior vice president of Equity Research at Dillon, Read & Co. Inc., general partner at Volpe, Welty & Co., and vice president at LF Rothschild & Co. Inc. Benny Lorenzo can be reached at