Hardware is the future of mobile software, and vice versa. What Intel’s acquisition of WindRiver really means.

[Intel buys embedded software company Wind River with a 40% premium. What is the hidden asset that silicon vendors value beyond standard metrics? Guest blogger Andy V. O’ Lay believes there is no more point in differentiating hardware and software in the mobile arena. The race to SHW has started…]

road-mergeIt’s not the first time in the mobile industry that a silicon vendor acquires a software company. Let’s not forget that behind the success of Qualcomm uiOne, there was Trigenix. Some also see beyond the failure of TI the shadow of the missed acquisition of TTPcom. These moves often prove decisive a posteriori. Here is why Intel and Wind River have set an important milestone in our industry.

A previous post (Mobile software is dead… long live, mobile software) highlighted the shift of mobile software development to post-load applications, enabled by the sudden proliferation of App Stores. Among the roadblocks in the embedded, pre-load business, two major issues were stressed:

– For software vendors, it is difficult to fight commoditisation and the related price-erosion while scaling up shipments. Only those vendors who have some unique IP managed to go down this route.

– Beyond the first design-win, deploying software across a variety of platforms and customers is a logistical nightmare. Less than 10% of the 250 mobile software companies we know have made their way to VisionMobile 100 million club charts.

Since then tables have turned and the mobile embedded software landscape has been considerably modified. Intel acquired Wind River, one of the champions of mobile software deployment, pioneer alternative business models favouring professional services fees for software integration, customisation, certification and indemnification.

The Intel-Wind River transaction is worth considering, not only because Intel agreed to pay a 40% premium over the stock price, neither because of the $884 million price tag (quite a lucky number even outside of China). It is a meaningful acquisition because it values mobile software companies on a totally unusual scale: what if IP was not a software company’s main asset?

Hardware & Software: Just Married

What Intel has bought and why
The press release claims that “the acquisition will deliver to Intel robust software capabilities in embedded systems and mobile devices”. Beyond such obvious statements, we must consider the fact that Wind River is all about delivery. The company brings enviable competence to ‘irrigate’ equipment manufacturers with new technology and more importantly, help with the painful integration process that will transform a collection of best-of-breed modules into a coherent product.

This type of competence is fundamental for an ambitious silicon vendor like Intel with PC-centric views on the mobile market. Indeed, it can take years to transform a design-win into a running line at the wafer fab (silicon speak for manufacturing line) and the key to hardware success is software.

We are not talking of specific software IP modules like a protocol stack, a midi engine, a browser or a codec. We are talking about system skills, and the capability to support large manufacturers on their own premises with outstanding engineers. We are talking about blurring the line between the system provider own workforce and the one of its customers. We are talking about permeable boundaries between supply and demand. And like Intel, I would argue that mobile software companies are instrumental in making silicon solutions pervasive, because they tick two major check boxes: reference design and support.

The hidden asset of mobile software companies
Mobile embedded software companies (e.g. Myriad, Access, Aplix, NXP software, Azingo) have a unique understanding of products as a hardware/software system. They understand how silicon can be leveraged, encapsulated and productised to fast-track device delivery. Beyond specific IP, these companies have the capability to build the very first product that will feature a new chipset. This is the reference design check box.

A reference design is not a half-baked breadboard; it is a scale 1:1 device, ready to ship.

The absence of such capability has drained Texas Instrument, once the mobile silicon leader. Alternatively, true reference design has been instrumental in the success of Qualcomm and Mediatek.

Mobile software companies have a structural asset: in order to promote the adoption of their modules, they have deployed local workforces to support each of the big handset OEMs. Their engineers are often working on the same premises as their customers, they eat at the same table, drink the same coffee (or tea) and solve issues together. On a P&L sheet, they call it Professional Services. On the Balance sheet, it should be called customer relationship. This is the support check box.

Support is not a way to charge more than just royalties, it is about making sure that the product will actually ship. Support is the last mile, the distribution channel that delivers a facility right into the customer premises. Support is what made Ericsson or ST successful; it is what was valued when NXP was acquired… and this is the rationale for Wind River’s acquisition.

What Intel has incidentally bought
The power to harm is seldom the main reasons for investing, rather the cherry on the cake. Whether used as dissuasion or tactical weapon, it should not be disregarded. There are a few nasty decisions that the “new” Wind River could be taking, which would seriously impact competing developments. Yet, it would be interesting to understand what is Intel’s competition: Qualcomm? Google? LiMo?

Along the same lines, it is interesting to note that although Wind River does not pretend to be an IP company, it has acquired almost accidentally an interesting patent from FSM Labs regarding virtualisation. I wouldn’t think this patent has a wide scope, but in the hands of Intel lawyers, it could scare some people off… and more about virtualisation in a future post.

Where does the industry stand today?
On the silicon side, we have an interesting situation with 3 big vendors.
– Intel has just acquired support capabilities, yet they miss a fully baked reference design.
– Qualcomm has a complete reference design, but they lack support capabilities, especially to address European markets.
– ST-Ericsson is difficult to read, they should have capabilities both in terms of reference design (from Ericsson) and support capabilities (from ST and NXP). Yet it is unclear whether such capabilities will survive the painful merger exercise.

On the software side, with Nokia acquiring Trolltech last year, and now Intel buying Wind River, the number of mobile software companies with a system-wide scope (capability to write/integrate modules at all levels of the software architecture) and Linux capabilities is reducing quickly: Access, Aplix, Myriad, NXP Software… who will be next?

The key point here is the hidden assets. Mobile software companies are bought for what they enable, not what they earn. Trolltech allowed the creation of a single application environment on top of Nokia S40, S60, and Maemo where Nokia can base both its Ovi *and* its ‘signature’ apps. Wind River equips Intel with a heavy-duty support channel. Access and Myriad both have an important hidden asset: operator-compliance. Two words that Apple and Google are slowly learning to spell.

The future is reunification
So Intel, who was already lining up hundreds of software engineers solely dedicated to Moblin (not counting the 5,000+ Moblin community), is now acquiring 1,600 software engineers who will “more tightly align their software expertise to Intel’s platforms”. This is a visionary move. Hardware (HW) and software (SW) guys realising that they need each other to grow.

So what does this mean?
– HW needs SW to sell.
– SW needs HW to scale.
– there is no longer HW and SW; there is SHW (read Systemware, pronounce chew, and remember you read it here first).
On the mobile racetracks, there is no room for two-seaters. Wintel has lost its initial, Qualcomm never got one… We all are Berliners.

– Andy

[Flashback. Three years ago. An influential venture capital firm gathers its telecom think tank off-site. During the wine-tasting session (wine-tasting is the venture-capitalist equivalent of engineers coffee machine) somebody asks: what is the only billion dollars mobile software company? Silence. More wine-tasting. No spit. Then comes the answer: Qualcomm. Hardware is also the future of mobile software.]


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