Is Intel Doing an End-Run Around Microsoft?
By Danny Hakim
REMEMBER WINTEL? In the 1990s, Microsoft (MSFT) made Windows and Intel (INTC) made chips,
and together the two titans ruled the computing universe. Seemed like a great marriage. Then again, so
did Billy Joel and Christie Brinkley. Now, Microsoft must feel jilted watching its old ally enthusiastically
aid and abet Linux, the open-source operating system that is seen as a burgeoning threat to Microsoft's
sprawling software fiefdom.
Wintel? How about Lintel. Count the ways Intel has embraced Linux: First, follow the money. Intel Capital,
the company's lucrative investment arm, has substantial positions in four leading Linux companies. Two of
the four companies have gone public, and Intel's combined stake in the pair added up to $870 million as of
Thursday's close. And since Intel uses its venture capital not so much to earn big returns as to pursue
strategic goals, those Linux investments are telling. Second, Intel is teaming up with Linux developers in
a number of projects. Analysts and investors say Intel aims to use Linux as a Trojan horse to get its
processors into more machines in non-desktop markets, where Microsoft is considerably less potent.
We'll start with the last point. The best opportunities for Linux come both at the high end of the market, in
powerful servers and workstations, and the low end, where many analysts believe a new generation of
low-cost, low-power computing devices are poised to redefine how society-at-large connects to the
Internet.
Already, Intel and Linux are teaming up in these areas. First, the high end. Intel software developers have
been collaborating with a consortium of Linux companies on the Trillian Project, an open-source
programming endeavor aimed at creating Linux software applications compatible with Intel's next
generation of high-powered Itanium processors. An Intel executive even helped demonstrate
Itanium-powered computers at the recent LinuxWorld Expo in New York, months before the new chipset
is expected to debut. Linux is one of many players in the server market, including the market leader, Sun
Microsystems (SUNW) and its Solaris operating system, Novell (NOVL) and, of course, Microsoft.
At the low end, Intel's first foray into branding its own computing device will be the Intel Web Appliance, a
stripped-down terminal that will be used for easy Web surfing. The Web Appliance marks a departure from
Intel's usual strategy of building parts that go into machines bearing other companies' brands. The
operating system for the Web Appliance? Yup. Linux.
"This can be seen as a move to control their own destiny," Investment Data Corporation analyst Dan
Kusnetzky says of Intel's Linux projects. "When it comes to various types of devices in the past,
Microsoft has exerted some influence to either prevent them from building something or to try and make
them use Microsoft software inside of the device, whether or not it made any sense to do so."
Intel has also been putting its money where its mouth is. One of its biggest investments has been none
other than Red Hat (RHAT), the North Carolina-based company that is generally considered the Linux
movement's leading player among a cadre of companies packaging software and support around the free
operating system. Intel's stake in Red Hat stands at about 4.5% of the company's stock, according to the
IDC.
The other public player among Intel's Linux investments is VA Linux Systems (LNUX), the Silicon Valley
Linux hardware maker and open-source portal. Intel owns about 8.9% of VA Linux, and is the
second-largest institutional investor in that company. Intel also has stakes in two privately held Linux
companies that presumably will join the IPO sweepstakes down the road. TurboLinux, a San
Francisco-based Linux software maker active in Asian markets, had Intel as an investor in both of its
rounds of private financing. And Intel has also invested in SuSE AG, a privately held German Linux
software maker.
INTEL'S LINUX CADRE
Company
Who are they?
YTD returns
Intel's Stake*
in millions
Red Hat
The North Carolina-based company is generally
considered the Linux movement's leading player among
a group of companies packaging
software and support around the free operating system.
-28.80%
$452
VA Linux
Silicon Valley Linux hardware
maker that recently struck deal to
acquire open-source portal Andover.Net (ANDN).
-42.90%
$418
TurboLinux
Privately held Linux software company.
Based in San Francisco, but known for its strength in Asian
markets.
N/A
N/A
SuSE AG
Privately held German Linux software company.
N/A
N/A
Source:SEC filings, Investment Data Corporation, Morningstar
*Figures as of 2/17/00 market close.
The returns on Intel's Linux investments so far have been staggering. Take the $2.5 million Intel invested
in VA Linux during two rounds of financing before the company went public. That's now worth $418 million,
a 16,620% return. Not too shabby. And money is only part of this story. Analysts and investors say Intel,
as an investor, first looks to form alliances. And that's what the company says, too. "Intel Capital is a
strategic investment program," says Intel spokesman Robert Manetta. "We invest primarily for strategic,
not financial, reasons."
Strategic reasons outweigh short-term financial considerations for the other side, too. Linux companies
could get up to 10 times more money for the same stakes that they sell to Intel, in the estimation of
top-Linux-venture-capitalist Andy Rappaport of August Capital. So why do they do it?
"None of these companies is taking Intel's money by itself," says Rappaport, who collaborated with Intel
in the first round of financing for TurboLinux. "For each of these companies, the motivating factor is the
opportunity to establish a strategic relationship with Intel. It's an opportunity to give Intel an interest in the
success of these companies, so there's some feeling of shared destiny."
Do these shared destinies spell doom for Wintel? Intel itself is notoriously circumspect about its strategy
with regards to Microsoft and its competitors. Ask the company about this evolving Linux relationship and
how it affects its bonds with Microsoft, and it'll make like Switzerland.
"We're neutral," says Intel spokesman Manny Vara. "We like end users to use the best system for
whatever they're going to do. If that's Linux, that's OK. If that's Windows, that's OK. We invest in
companies that we believe will make computing more appealing to people."
OK, that's true. Intel is certainly not abandoning Microsoft. Why would it? By most analysts' accounts,
Microsoft will have a stranglehold on the desktop marketplace for the foreseeable future. After all, now that
we've all been weaned on Microsoft Office, do we really want to learn something new? Then again, it's in
other marketplaces that opportunities are blooming for Linux, and Intel's strategy is to ride as many
horses as it can. Linux? Windows? Who cares, as long as it has Intel inside.
What does this mean for investors? For many kick-the-tires types, Linux is akin to Internet companies 18
months ago, before their stock prices climbed so high that even the crustiest of fund managers now
figures this Internet thing may be for real after all. But these same fund managers roll their eyes over
Linux. Will Linux companies ever justify their current valuations and have revenues that catch up to their
multibillion-dollar market caps? That's a bet that would be difficult to place odds on. But consider this: The
world's largest semiconductor company is cozying up to Linux. Do you think it will disappear anytime
soon?
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