Q&A: A Leading Venture Capitalist on Intel's Linux Strategy
smartmoney.com
WHAT ARE INTEL'S intentions in its dance with Linux? We asked Andy Rappaport, a partner at Silicon Valley venture-capital firm August Capital, for his thoughts. August has purchased stakes of 10% or greater in three Linux companies: TurboLinux, Cobalt Networks (COBT) and Cygnus, which was recently acquired by Red Hat (RHAT). More important, Rappaport has seen Intel (INTC) at work. The chip giant and August Capital collaborated in the first round of financing for TurboLinux. What's important in the Intel/Linux relationship, Rappaport says, is what's "behind the money."
SmartMoney.com: What does Intel's movement into Linux mean for Wintel?
Andy Rappaport: Intel and Microsoft (MSFT) have been locked in a zero-sum game. Who's made money in the computer business over the last 10 or 15 years? Intel and Microsoft and then a bunch of others. While the market has been growing at a dramatic rate, it's been easy for both companies to say the rising tide will lift us both. But to the extent that one can see a reduction in top-line growth in the traditional PC-oriented market, and opportunities for different kinds of growth in other markets, I think each of those companies is saying, "How can we detach ourselves from this zero-sum game?"
Intel is doing what any responsible company would do to create an environment where its market share can increase and its gross profit share can increase. Obviously, Linux is one of the tools it has at its disposal.
SmartMoney.com: It seems like Linux has opportunities for Intel in both the high-end market and the low-end market.
AR: Intel has been very smart about something. They figured out, years ago, that supporting the emergence of new computing applications, one way or another, will be good for Intel. Look at Intel's strategy in the Internet, and look at Intel's strategy with respect to ISPs, and look at Intel's strategy in multimedia and entertainment.
Intel figured out that if they can grow the market for computing-oriented devices, that if they can't figure out a way to profit from it, well, shame on them. They're doing it again with Linux. To the extent Linux is enabling new classes of applications and devices to emerge, whether it's a Cobalt network appliance or a Diamond info pad, on down the line, Intel looks at it and says, OK, that's creating more demand for chips, and we ought to be able to satisfy a disproportionate share of that demand. This is good for us.
SmartMoney.com: How important is it for the Linux community to have Intel taking sizable stakes in companies like Red Hat and VA Linux (LNUX)?
AR: Intel's investment per se is no longer particularly influential to these companies. The reason is that accessing capital is not a difficult thing for Linux companies these days, because of what is perceived to be the future importance of Linux and because of the immeasurable momentum of Linux, and the fact that investors have already made money in the Linux marketplace.
There's plenty of money available for Linux companies. Quite frankly, when TurboLinux did its financing ? and I think this is typical of Intel's investments in these companies ? Intel wanted to invest more than there was room for Intel to invest. So, the money per se is not having the meaningful effect.
What's having a meaningful effect on the market is Intel's behavior toward Linux behind the money, and the fact that Intel is working actively to insure that Linux companies have access to customers, that Linux companies have access to technology, that Intel is on the forefront of the evolution of Linux. Even if Intel were not investing in these companies, Intel's role behind the scenes would be very significant in the overall maturation of Linux as an operating system.
SmartMoney.com: Intel is not the average VC investor. Don't they have more of a strategic approach to investing?
AR: From Intel's point of view, there are two objectives. One is that the money is a way to get close to these companies so they can establish a working relationship. In addition to that, Intel has the tactical objective to make money on its investments, and who can blame them?
If you look at it from the [Linux] companies' point of view, it's entirely strategic. There are many sources of money that come at better pricing for [Linux] companies. None of these companies is taking Intel's money by itself. 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.
SmartMoney.com: So some of these Linux companies could have gotten better terms than what they got from Intel?
AR: Oh sure. Intel is a savvy investor, and Intel drives a hard bargain. I think Intel shareholders should be very happy with the way Intel employees manage Intel's cash. So, especially in a hot market like Linux, where, frankly, people are throwing money around, I think it's possible for companies to raise money at two, three, four, five?even 10 times the price that Intel is willing to pay as a savvy investor. The reason these companies are taking Intel's money is a desire not just to have the money itself, but to have the value attached to it. |
