As Intel forks out $8bn in cash for security software specialist McAfee, industry watchers ask whether it's worth it - and what it means for the industry.
Intel CEO Paul Otellini betrayed no doubts when he described the thinking behind the chipmaker's $7.7bn cash buy of security software specialist McAfee. 'Over the past couple of decades there have been a few critically important inflexions in the computing landscape. During the past decade, a combination of wireless connectivity and energy-efficient computing platforms drove an explosion in mobile computing. Today, I believe we are entering a new era in computing platforms that will impact users worldwide," he told an analysts' conference call.
Otellini pointed to an increase not only in the number of hacker attacks but also in their sophistication. 'The number of new threats identified every month continues to rise,' he claimed. 'We have concluded that security has become the third pillar of computing alongside energy efficiency and Internet connectivity, and we believe security will be most effective enabled in hardware.'
Ren'e James, general manager of Intel's software and services group, says that the strategy now is to grow sales by selling security software alongside the company's traditional hardware products. She amplifies Otellini's argument with the claim that security presents 'pressing problems [that] will require both hardware and software solutions'.
The first post-McAfee product will be aimed at the bedrock PC business, but James identifies smartphones and devices such as Web-connected TVs as future targets. She says her division's vPro extensions for virtualisation and security - as well as its recently launched anti-theft technology for laptops - show that McAfee fits into a strategy Intel is already pursuing.
Dave DeWalt, president and CEO of McAfee says the growth in Web-connected devices makes for 'a new threat landscape'.
Historically, Intel has segmented its security extensions for processors by end-market, limiting some features to server-class processors and not supporting others at all in low-end processors. James indicates that the renewed push to develop secure hardware will extend down to the mass-market Atom processor family, designed for netbooks and embedded hardware. 'Anywhere,' she says, 'Intel is selling silicon.'
Otellini explained: 'Anywhere we sell a microprocessor is an opportunity for a security software sell to go with it.' He insisted, though, that Intel will continue to work with other security vendors.
Quite how the company will charge for security software on a device such as a smartphone or an Internet TV is still to be decided, Otellini admitted. However, in the case of security software products, he said, 'These things have an annuity stream associated with them.'
Francis Sideco, principal analyst for wireless communications at iSuppli, sees the acquisition as 'part of the mobility solution' for Intel.
'As phones become more computer-like or perform more compute-related tasks, security is going to be more of an issue,' Sideco says. 'Intel's strategy for smartphones is one of its main legs, but only part of the overall strategy. You also have all the consumer electronics devices that are getting mobilised.'
On Intel's acquisition conference call, Wall Street analysts such as Uchi Orji of UBS wondered aloud as to why Intel was buying McAfee instead of simply inking a long-term collaboration deal with the company.
Otellini countered that Intel chose to go for an outright acquisition after the two organisations had been working together for 18 months on a project to unlock hardware features in current generations of PC processors.
'In working with them, the notion of moving beyond just partnering became very clear. The products coming out in 2011 are very exciting. They will add a measure of security to the platforms that are in use today,' Otellini explained.
One question has to be whether there are the sales to justify the near $8bn all-cash deal. 'It's a huge price,' says Malcolm Penn, president of analyst group Future Horizons. 'However, the company can still look at it as petty cash.'
Sideco says: 'If they feel it will give them an iota of differentiation it's fair game given the resources they have from a war-chest standpoint. It doesn't not make sense.'
On a standalone basis, McAfee has annual revenues of around $2bn, yielding profits of around $200m, so it would take some time for Intel to see a return on its cash investment. But if Intel can achieve some kind of lock-in in strategic markets, the profit it believes a combined company can make may explain the willingness to pay such a premium.
Penn points out that McAfee's most lucrative products are intended for servers, and this is Intel's most profitable territory.
'AMD has tweaked its tail at the client end of the market. But at the high-end server end: zero. That is Intel's domain and they can protect that a lot more,' Penn explains.
'Whatever the strategy behind this, it's to control something. It's what Intel does. The goal must be to lock everybody else out or make it very hard to compete. Whatever it is protecting, it's high price and high margin. It's unlikely to be commodity and high volume because they are not good at that.
'McAfee in servers is the king. Antivirus on client is very different to antivirus on a server. You could easily see how they could put a layer of hardware around that. That is what they typically do; make it hard for anybody else to perform. Ten years later when they get slapped on the wrists by the government, it's all over,' Penn warns.
DeWalt will head McAfee as an independent subsidiary, a similar model to that Intel applied after buying embedded software specialist Wind River Systems last year. He says protection for servers is very much part of the merged company's thinking: 'What you are seeing is a lot more functionality moving to the Cloud. Think of every website having a reputation. Our ability to leverage the platform that Intel has is very valuable.'
Sideco says: 'To what extent they will be able to embed the McAfee technology and give their solution differentiation is an execution issue. But from a philosophical standpoint it very much could work out for them.'
Penn argues the problem for Intel is its domination, courtesy of its near monopoly in traditional computing: 'They are generating cash by the bucketload. It is the classic McKinsey guideline: when you have a saturated market, what do you do? You go out and buy something.
'The question is whether it is money well spent,' Penn asks, pointing to the many acquisitions that Intel has made and then shuttered or hived off. 'Most of the other investments have been a total failure.'
Earlier this decade, Intel had a position in smartphones and mobile Internet devices through its Xscale operation, acquired from Digital Equipment. But the company sold the ARM-based processor line in 2006 to Marvell. Intel has since tried to re-enter the mobile-computing space with the x86-based Atom family of processors. Its second attempt at the mobile computing and smartphone space now includes the purchase of Infineon Technologies' cellular communications chipset operation, just weeks after a similar carve-out deal with Texas Instruments for cable modem chips.
Sideco observes: 'I think the ecosystem and the market demand is markedly different now from what it was when they did the Xscale thing. The capability of the devices in this mobile area and what customers have come to expect play into Intel's favour.
'As I watch them make this latest attempt into he mobile area I haven't seen them yet stub a foot. Each move they have made may not have necessarily been successful, but nothing hasn't made sense. They are moving towards what appears to be a solid position.'
Sideco acknowledges companies may worry about handing business to a supplier that has ruthlessly controlled its corner of the compute-processor space, a factor that makes it harder for Intel to expand from that sector: 'I think there is always that fear. But with what they are doing with Nokia on [the] Meego [mobile platform] and with the acquisition of Infineon's mobile business, these are established mobile players they are working with. If you can show that whatever you are going to sell customers has such an edge in battery life, performance or ecosystem, you will have some success.'