Is Intel Doing an End-Run Around Microsoft?
By Danny Hakim
SmartMoney Interactive Edition
smartmoney.com
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 in 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 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.
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?
Best of luck.
LINUX ... You've come a long way baby. |
