Wind River buy makes Intel a software company

Thousands of Intel employees already work on software, but with Intel's agreement to acquire Wind River Systems, the chipmaker is moving software from an indirect supporting role to a significant and direct revenue stream.

Intel's primary business is developing, manufacturing, and selling microprocessors, but software has gradually been rising in prominence. Starting years ago from only basic ingredients such as programming utilities, Intel has been gradually expanding its software work, for example by pushing the Moblin mobile Linux project and bulking up its Software and Services Group through a spending spree for smaller companies such as videogame physics engine maker Havok.

But Intel's agreement to acquire embedded computing specialist Wind River for $884 million in cash, announced Thursday and expected to close this summer, is on an entirely different scale. Wind River offers multiple operating systems and developer tools designed to be embedded in a multitude of products such as cars, printers, networking equipment, and phones. It's got a solid list of customers including Sony, Verizon, Boeing, and BMW; employs more than 1,600 people; and reported revenue of $359.7 million for its fiscal year that ended in January.

"It was a natural marriage," John Bruggeman, Wind River's chief marketing officer, said of the acquisition agreement. "You had a software leader looking to scale, and you had a bigger company looking to build a software franchise."

The proposed acquisition stops short of making Intel a head-on competitor with one of its biggest allies, Microsoft, because Wind River's operating system--a version of open-source Linux and its proprietary VxWorks--aren't aimed at PCs. But just as the arrival of Linux helped limit Windows' growth on servers, Intel's acquisition of Wind River could hurt Microsoft's ambitions for products such as Windows Mobile and Windows Embedded. Wind River supports not just Moblin but also Google's Linux-based Android operating system for mobile phones.

Microsoft isn't the only partner whose turf Intel would be edging onto with Wind River. Apple, which uses Intel chips in desktop and laptop computers, has its own iPhone business to promote.

Spending spree
Clearly, Intel hopes to benefit from software skills and products. Among its acquisitions in recent years are Neoptica for visual computing, OpenedHand for Linux user interface expertise, Swiftfoot Graphics for graphical rendering technology, Sarvega for XML processing, Elbrus/Unipro for Java and compiler tools, and Offset for visual computing. The general trend: Intel wants to supply its customers with more than just pieces of complicated silicon.

"We think this acquisition of Wind River is, potentially, a first step in Intel diversifying its business model towards that of IBM, a company that sells hardware, chips, software, and services worldwide," wrote Friedman, Billings, Ramsey Group analysts Craig Berger and Robert Pikover in a research note Thursday. "If Intel is beginning to diversify its business away from just semiconductors, we would expect a host of similar software- or services-related acquisitions in coming years."

Wind River's brand will live on at Intel, but the acquisition will mark the end of the independent history of an embedded computing player that's survived tough times and many market changes since its 1981 founding. Investors weren't sentimental, though: the company's stock jumped from about $8 per share to more than $11.50 in trading Thursday.

"We expect minimal changes to the business functions and organizational structure since we'll be a wholly owned subsidiary maintaining our current business model, brand, and product portfolio," but there will be some layoffs from redundancies, Wind River spokesman Bryan Thomas said.

Intel's name could give Wind River more clout in its own business transformation toward Linux. After a period of fighting Linux, the company has been trying in more recent years to embrace it, and it currently accounts for about 20 percent of the company's revenue compared to 80 percent for the VxWorks "legacy" business, Bruggeman said. Intel has for years been a serious Linux supporter, and the combination of the companies would bring more heft to the work.

Intel is best known for selling CPUs under brand names such as Pentium, Xeon, and Core, but it's also trying to get its newer Atom processor family to catch on in embedded computing. Today, that market is dominated by ARM and PowerPC chips, and Wind River not only has a long list of potential customers, but also programming tools that could help them use Atom.

In a May meeting, Doug Davis, general manager of Intel's Embedded and Communications Group, said that embedded computing is a multibillion-dollar growth opportunity.

"This will let us do it a lot faster if we can get the software expertise along with the Atom processor to hit some of these markets," said Intel spokesman Bill Kircos. "Everything is becoming more computerlike and more Internet-savvy. That's the growth we're trying to aim for."

Here, Wind River's customer base will come in handy.

"Any phone call made any time anywhere to any place crosses our software somewhere along the route," Bruggeman said. "If you get on flight today or tomorrow, it's very, very likely the navigation system, landing sytem, autopilot system...is based on our software. If you're driving a car, our software was used in the car or the robot that produced that car."

No promise of success
Of course, Intel's power and technology doesn't guarantee success in entering new markets. The company largely withdrew from an attempt expand into communications and networking technology, for example, and it sold an embedded computing processor family, XScale, in 2006.

What makes Atom different from XScale is that Atom uses the x86 instruction set found in Intel's core product lines. That means much of the software and software technology from the PC market carries over to embedded computing. Intel hopes to spread x86 from high-end servers to mobile phones, but for the latter category must reckon with chips using ARM's architecture that are built by Motorola, Qualcomm, Samsung, and others.

Right now, Atom is the challenger to the ARM and PowerPC incumbent chip families in embedded computing, Bruggeman said, and Wind River as a part of Intel won't drop its existing work with those other chip families.

"This move was about creating a software franchise in the embedded and mobile space. If you're going to create a franchise in this space, you have to support multiple architectures," Bruggeman said, noting that Wind River will report not to a hardware executive but to Renee James, general manager of Intel's Software and Services Group.

"Intel's traditional embedded business (based on legacy Pentium processors) already generates more than $1 billion in annual revenues. Further, Intel said it has 300 embedded design wins and 1500 design engagements with the eight Atom-based embedded SOCs it has under development," Berger and Pikover wrote.

But that doesn't guarantee Intel success, they said. Intel's embedded computing strategy is "somewhat of a 'show-me' story given the firm's many largely unsuccessful attempts at growing various chip businesses outside of its core processor and chipset markets."

Adding a serious software portfolio, though, dramatically changes Intel's approach to embedded computing. Not only does Intel get a new revenue stream, new expertise, new customers, and new sales and support staff, it gets an opportunity for much fuller relationships with customers. Selling a company a chip is one thing, but selling them a chip, an operating system, and the developer tools to make a product work requires much closer and deeper ties.

Intel is betting on Moore's Law carrying computing to many, many more devices. It's not clear what share of Intel's PC and server dominance will carry over to an embedded computing market fragmented among many players and do-it-yourselfers. But with Wind River in house, Intel is in a much stronger position lead a wave of consolidation.