Intel-WindRiver: What the Merger Means

Clearly defined lines between the software and hardware worlds are getting fuzzier. The most recent evidence came on June 4, when Intel, the world's largest maker of computer chips, said it will buy software maker Wind­River.

Expected to close this summer, the $884 million acquisition not only pushes Intel (INTC) deeper into the market for a wide range of non-PC machines, but it's also likely to shake up long-standing tech alliances and could prompt more deals among makers of hardware and software.

For years, software makers such as Microsoft (MSFT) operated independently of chip manufacturers. But as computer technology gets woven into a larger array of machines, including smartphones, robots, and even cars, there's an urgent need for closer cohesion between hardware makers and developers of software, which in many cases fails to mesh well with increasingly powerful and speedy chips. Apple (AAPL), which specializes in making machines and the software that runs on them, last year acquired chipmaker PA Semi.

Intel has dabbled in software through its software-and-services division for the past 15 years, but the unit has never made money and exists mainly to support sales of related chips. "We know how to build and deliver software profitably," says John Bruggeman, chief marketing officer at WindRiver, the world's largest maker of non-PC computing software.

non-pc computing is a fast-growing market

With WindRiver, Intel wades more deeply into a large, lucrative market that includes robotic gear, smart wireless routers, and in-car entertainment systems. Until now, Intel has generated annual sales of about $1 billion, a fraction of its total last year of $37.6 billion, from non-PC machines. But non-PC computing—a category that excludes smartphones, netbooks, and traditional computers—generated $900 billion in sales in 2007, according to consulting firm IDC. That makes it four times larger than the market for PCs, and it's growing almost twice as fast.

As Intel moves onto new turf, it's also likely to sell its own chips to existing WindRiver clients, which include Alcatel-Lucent (ALU), Boeing (BA), General Electric (GE), Raytheon (RTN), and Samsung Electronics. If Intel can offer WindRiver software with its chips at a reasonable price, "there'll be few companies that won't buy it [from Intel]," says Richard Williams, an analyst at Cross Research. That poses a potential threat to rivals such as Freescale Semiconductor, Renesas Technology, and Texas Instruments (TXN).

The acquisition should also help Intel take a more active part in the growth of the Android operating system, developed by Google (GOOG) and other members of the Open Handset Alliance, including Intel and WindRiver. Shipments of Android devices are expected to rise tenfold this year, according to consultant Strategy Analytics. By yearend, WindRiver will have aided in the design of about one-third of 18 Android-based phones expected to be released. At the Computex industry trade show in early June, Intel demonstrated Android running in tandem with other software, but the company has largely remained on the sidelines of Android development.

hitting the ground running

Intel may be interested in developing its own custom version of Android that would run on its upcoming, next-generation Atom chip. Ramon Llamas, a senior research analyst at IDC, speculates that some new packages incorporating Intel-WindRiver products could be ready to ship in commercial products, such as cell phones and netbook-like devices, within one to two years after the acquisition closes. Since Intel and WindRiver have been partners for more than 10 years, they could deliver a product even faster. The two companies began co-developing products for the automotive and mobile markets a year ago. "It's not like we are starting from zero," Bruggeman says. "We are already moving at top speed. In many market segments we already have solutions."

The purchase could hasten other software-hardware industry mergers. By optimizing its chips for the software, Intel may be able to increase its edge over competitors that offer only one or the other. "Intel wants to expand its bill of materials in devices," says Matt Petkun, a vice-president at investment bank D.A. Davidson & Co. who says he owns WindRiver shares.

Rivals may try to catch up by making their own software-hardware acquisitions. Microsoft could target a chip company or a hardware maker in the coming years, Bruggeman says. Potential acquisition targets for chipmakers like Freescale and others could include makers of software and related tools for the non-PC computing market, such as MontaVista Software, Green Hills Software, and QNX Software Systems International. "When Intel enters the fray, it's no longer a move of a pawn on a chess board," Bruggeman says. "Major pieces have been brought out."

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