Project Network Effects: Wind River Systems (WRS; WIND) (Cont.)
Part III. A. WIND's Network Effects From Semiconductor Companies
Warning: This Paragraph Uses High Pressure Sales Tactics. The Gorilla Game's Geoffrey Moore says the Internet is a hundred-times-revolutionary advance. Many members of SI, like Merlin, are already profiting from its network effects. How might you profit from it? You could make a commitment to read the Shapiro and Varian book, but I'm merely asking you to read on. Why? You know why, because the concept of network effects is the next big analytical tool for an intelligent and sophisticated investor like you. Don't you want to get in on it, or do you want to fail? How do you stop yourself from adding this tool to your investment approach? You do want to invest in winners, don't you? If you can just begin to imagine mastering this arcane art, then you can and will. Just imagine what you will do with all of your profits. Who will you impress with your investing skill? Because you are already smart and savvy, you too can be a winner using this easily learned yet highly profitable investing tool. Make a commitment now! Say, "yes" aloud now. Many of your fellow investors already are boasting about their profits. Yes. Yes, you too can be like Mike or Bruce Brown. All it takes is an open mind and a few minutes of reading. You are open-minded, are you not? Yes. You can read, can't you? Yes. Given all that I have done for you in writing this, reading it is the least that you can do, isn't it? Yes. Successful investors like you are committed to learning whatever it takes to make real money; you are too, aren't you? Yes. Then, go for it! YES!
Since these Network Effects Reports are intended, above all, to be educational, you want to learn how to identify network effects generically. First, simplify the task by remembering that Everett Rogers, the Father of Innovation Research, defined "diffusion as the process by which an innovation is communicated through certain channels over time among members of a social system." Second, to examine potential network effects, focus on the drivers of strong network effects, interactivity and compatibility by finding both the social networks that permit the process of interaction among susceptible individuals to occur and the elements in a value chain in which compatibility among linked elements creates a total solution. Third, after identifying promising interactions in networks and compatibilities in value chains of products, imagine how influence specifically diffuses specific innovations that become more valuable as they become more popular until they reach critical mass or become a standard solution. Fourth, consider whether network effects have reached critical mass or just when cumulative adoption is expected to inflect rapidly and lock-in a strong, sustainable, and measurable competitive advantage.
Identifying network effects only requires rudimentary social psychology or folk psychology, just using common sense approaches that are used in business everyday. We only need to answer questions like: How do people influence each other to try something new? Who is particularly influential? What sorts of influence-interactions are useful? How and when does a bandwagon form? How do we target susceptible adopters? What are the barriers to adoption? How are they overcome? This is the social psychology of influence.
Next, lets use WRS as an example of this process for finding network effects by examining compatibility in its end-to-end solution within its value chain and the interactions among its networks of partners in value creation before turning to WIND's exciting mass market lily ponds that promise significant network effects in the cumulative adoption of products.
In discussing last quarter's result on CNBC, Chairman and Co-Founder Jerry Fiddler said:
What's unique about Wind River is we are end-to-end in two ways. We are end-to-end through out the Internet because our software is key and pervasive in servers, in infrastructure, and in the clients [smart devices]. We are also end-to-end throughout the development cycle. We can help the customers do everything from bringing up their hardware, supply software tools, operating systems, middleware of various types, JAVA protocol, all of the way through full solution products. We wrap all that is a set of services and now even help manage the devices once they are deployed. There really is no one else who has that chain available.
So, Wind River offers an end-to-end-software-plus-service-solution for OEMs that reaches end-to-end-across-the-Internet. Let's count and illustrate its network effects:
First, an End-to-End Solution. Each element, even each feature of an element that offers a competitive advantage, in its end-to-end software solution is an arithmetic node that creates an exponential indirect or compatibility network effect. So, the five enabling layers of software might be counted, say, as five nodes. However, the differentiation of products within each of these layers as specific software features providing a competitive advantage must raise that arithmetic number of nodes considerably. For example, the OEM may require that the RTOS kernel scale down to a very small size, or that it be ported to a specific microprocessor, or that the RTOS be pre-integrated with a processor, or that the RTOS plus Application must meet RASS (reliability, availability, security, and serviceability,) requirements, or that memory in the Internet application that he is designing be protected from contamination by outside code. Any RTOS without the critical feature is useless; with the feature, it becomes very valuable. With an ideal set of features that permits the development of diverse but specific differentiated applications, the total solution becomes not only more valuable than its closest competitor's product without these features, but also it explodes in added value.
For instance, the Internet swells demand for continuous uptime in smart Internet devices, often requiring the high-availability of 99.999% uptime. Yet, software content and complexity continue to grow. Applications exceeding 1 megabyte of code are commonplace. Complexity is created by the movement from isolated embedded to networked embedded devices, from single and fixed to open and multifunctional tasks, from unmanaged to managed devices, and from within to cross-corporate development teams. These complexities in market trends are driven by the increasing importance of the Internet, creating strong pressure to develop open, rather than proprietary, HA systems. WIND has offered a fundamentally new approach here. For instance, serviceability in HA systems requires support for hot swapping of hardware and software components, for automated updating of smart devices, and for customized field service. How much value is added by WIND's move to high-availability systems?
Or, as another example, the Tornado Integrated Development Environment has many tools for communicating to the processor target, for auto-scaling, for visualization, for compiling, for debugging, for testing, and so on. Any one tool adds value, but, when taken together with the other tools in the set, it may add exponential value either because of the value any necessary or critical tool adds or, because, as a set, the integrated tools provide a total solution to previously unsolvable development problems. This marked expansion in value is an indirect network effect because each compatible tool potentially adds non-linear value to the combined set of tools.
As a third example, in December, WRS unveiled two upgraded versions of independent development tools that lie outside their Tornado Platform because they were ISI products: SNIFF and MATRIX. Because industry experts estimate that software coders spend up to 50% of their time searching for basic information buried in code, the award-winning SNIFF+ 4.0 source code analysis environment sharply reduces this wasted time by integrating code browsing, searching, analysis, revision, and updating into a single environment that is fast and scalable, useful across multiple coding languages, interactive and automatic in its updates, and supports multiple platforms.
Dataquest reports that, as design become more complex, design methodologies move toward adoption of system level design and integration. To increase efficiency by meeting the complex design requirements of software for automotive and aerospace control systems, MATRIXx 7.0 permits faster design times with fewer errors by adding new design constructs and facilitating teamwork. The Matrix product family is the industries only complete solution for graphical design, simulation, automatic code, rapid prototyping, and testing of real-time dynamic embedded control systems. It was used to design and generate code for the VxWorks RTOS in the International Space Station.
These high-level software design tools are the wave of the future. They contain multiple elements in which each set of specific technical advantage provides multiple competitive advantages, but also that, taken together, combine to create the system's explosion in added value. To keep up with the demand to produce billions of designs for trillions of embedded products, the ability to abstract the processes of design through the use of high-level tools that permit both object visualization and the linking up of standardized modules is a necessary technological advance in software coding. Connecting reliable building blocks, as both tools and function-modules, is the only way to avoid the human errors that are always present in truly long software codes. Complex adaptive system must be built from the bottom-up using tools that offer a simplified top-down perspective.
Of course, as the compatibility of the end-to-end solution continues through software-hardware integration to middleware and on to management and serviceability, the added value becomes explosive. All building blocks are pre-integrated, made compatible, with the WIND RTOS and Tornado development environment, including meeting all industry standards for stack, drivers, and protocols. At Wind River, integration produces both compatibility and connectivity with the Internet. And, WRS is spending 75M on R& D, this year to improve their tools, continuing to raise the level of barriers to entry and switching costs by continuously adding innovative competitive advantages.
Or, they acquire former WindLink partners who offer what they need. For instance, consider the October announcement of the acquisition of Rapid Logic, which makes network management software for smart connected devices, such as switches, routers, servers, and DSL or cable modems for Internet appliances such as set-top boxes and smart phones. More than 100 intelligent device manufacturers, including the top 10 device manufacturers in the datacom, telecom, and office automation industries, have deployed RL products on more than 200 platforms. The RapidControl Backplane uses a single code-image to support multiple external interfaces, including SNMP, HTML, JAVA, XML, etc. Management code makes up about 50% of a smart device's overall code. RL products provide efficient network management by accessing and controlling data located in Web-based embedded devices; yet they can be developed in 10% of the time required by other approaches. RL's middleware will be pre-integrated in WRS's advanced integrated development environments, including Tornado for Managed Switches, Tornado for Internet Appliances, Tornado for Integrated I/O, and Tornado for Home Gateways. Wind River will bring this management capability to every product. For instance, using the RapidControl Backplane in building a router would allow network administrators later on to analyze and change the functionality of that router over the Web. How much value does a network management solution add?
As a striking example, recall how the small rover vehicle in the Mars Pathfinder mission kept unexpectedly rebooting when it ran into an obstacle. NASA simulated the problem and discovered that an incorrect coding priority was setting off the reboot. The solution required that a toggle switch be changed by radio. The successful mission continued, thanks to Wind River. What value did its serviceable software add?
So, how do we count the compatible nodes? Do we count the layers, the tools, or the features? Each tool saves development time and reduces errors; each technical feature adds functionality. Do we multiply technical features or the tools across the five layers to approximate their non-linear value? Of course, what matters here is not a precise metric but the realization that integrated technology exponentially increases in value because of indirect network effects. The total value expansion becomes much more than the sum of the parts, inflecting skyward as it explodes in value.
Increases in complexity across hardware, in hardware-software integration, in RTOS requirements, in the basic platform for integrated development of applications, in middleware necessary to meet standards for interfacing and connectivity and for middleware specific to Internet and wireless Internet communication increasingly pressure companies to outsource these features to the dominant COTS system.
For example, consider wireless connectivity for smart devices. Last September, Wind River and Ericcson signed a strategic worldwide agreement for Bluetooth integration into its embedded software. The Bluetooth wireless technology is a universal, short-range personal area networking radio technology for wireless connectivity of voice, data, and multimedia applications. Wind River's BlueThunder, their out-of-the-box solution, integrated Ericcson's Bluetooth Host stack with VxWorks and Tornado for Internet Appliances.
Given the overarching need for a compatible and integrated end-to-end software solution, these value-additions, when taken together, promise a future of explosive growth. As the complexity of Web-based devices, the need for high-availability and memory protection, and the need to continually update the functioning of smart devices continues to grow, the value of WRS, the ubiquitous embedded enabler, will expand it markets and penetration exponentially. Because its broad and differentiated, but integrated, products and features add exponential value to WIND's software, these compatibility network effects also must produce a higher rate for run-time royalties as well.
The Five Networks of Portability, Value-Added Resellers, Centers of Excellence, WindLink Partners, and Embedded Application Developers.
The relationship between an embedded microprocessor and it embedded RTOS is complementary: only when integrated do they create an embedded system. Each must have the other to create a win-win value proposition. Still, the complementor relationships can be promiscuous, committed, or strategic. There are three Networks of Complementors in WIND's value chain, in ascending strategic importance: ported software-semiconductor relationships, VARs, and CoEs.
Unlike the Intel-Microsoft relationship of complementors in the PC era, in the Internet era of smart connected devices, the OS must be real-time, deterministic, portable to multiple processors across many different APIs, designed for a market niche requiring specific real-time functions or actions, yet remaining slim, robust, reliable, secure, serviceable, and connected. Given the diversity of uses, this market-dynamic does not permit any single microprocessor architecture to dominate all markets. This is so because the purposes of diverse embedded microprocessors are specific, not general, like those of a central processor. Each embedded microprocessor's architecture is designed to add specific differentiating competitive advantages. This diversity in specificity of purpose creates complexity when porting software to the multiple interfaces of diverse semiconductor microarchitectures.
Applications are no longer shrink-wrapped Microsoft-compatible software that is added to the general-purpose Microsoft operating system as an application. Instead, applications are individually created in hardware, just as the RTOS also is inscribed into the hardware, using a development environment that permits the integrated processor plus RTOS plus application to become the OEM's differentiated product, whether a switch, an intelligent phone, an MRI, or the like. As Fiddler said in Forbes, "On the desktop, the OS defines the device. That doesn't fly in this world of smart devices. Here, the device defines what the OS needs to be." Here, where one size does not fit all, software engineers tailor the embedded system to fit a specific set of deterministic functions. Instead of everyone being forced to fit into Microsoft's procrustean bed, it becomes collaborative: how can the universal enabler, Wind River, fit the hand into the glove: by maximizing the value of a designed application's fit to a specific semiconductor's microarchitecture.
Second, Portability. WIND is in an enviable one-software-complementor-to-many-microprocessors-relationship across the domain of embedded semiconductor companies. WIND's ability to abstract the process of porting its software to many microprocessors (over a 100 variants in 20 families currently, and semiconductor product-turns are speeding up) is a significant competitive advantage. If you are not ported, you cannot compete.
These relationships developed through time; early on, WRS had to bear the costs associated with porting; later on, porting became an initial expense of the semiconductor companies. Because the WRS porting process (and RTOSs) works reliably, the Wind River solution is naturally becoming a standardized solution across microprocessor families. The semiconductor companies want to use the WIND solution because porting is also key to their value proposition.
Beyond the domain of simple porting itself lies the realm of pre-integration of hardware with software. WIND's proprietary system combines Tornado with EST hardware-assisted tools to optimize embedded system performance by speeding hardware diagnostics, automatically initializing target chips, downloading code to the target 10 times faster, and debugging code using two integrated tools simultaneously: EST's visionControl manages the microprocessor while Tornado's CrossWind debugs over the network. In July, Wind River expanded it hardware-assisted strategy to support MIPS ARM, and Hitachi Processor families. So not only, does WIND port to more processors, but also its tools are better suited to pre-integrating hardware with software, creating optimization and time-to-market competitive advantages. Moreover, the variety of types of processors supported continually increase to include network processors, microcontrollers, FPGAs, DSPs, and the like. To illustrate these trends toward pre-integration and increased complexity, some recent press releases are summarized:
On January 16, 2001, Wind River extended their cooperative development agreement with Motorola to include developing a reference design and TMS II switch support, the first off-the-shelf solution enabling Layer 3 IP routing and advanced quality of service, by porting it to the C-Port C-5 Network Processor for use in Gigabit Ethernet and SONET-based optical switches in WANS and MANS.
On January 9, 2001, Wind River announced broad product backing for Motorola's latest ColdFire Microprocessor for Ethernet, including hardware-assisted debugging and integration using visionPROBE II, visionICE II, visionCLICK, visionTRACE, and Single-Step. Also, included in the package were the WRS Tornado II, Diab C/C++, and FastJ compilers and RTA Suite tools.
In November, Motorola announced a strategic agreement with Wind River's Dr. Design Services group to develop networking and communication application for third party customers using Motorola Power QUICC II architecture. In designing products using the Motorola processor, Dr. Design's "concept through manufacturing" implementation uses a basic tool chain that includes both Wind River's Hardware-Software Integration Business Unit and its networking protocols from the Networking Business Unit to take full advantage of the Motorola processor's built-in communications processor module.
Also, in November, WRS teamed with Xilinx, the leading supplier of programmable logic devices to develop a unified software-hardware solution for the Xilinx Platform FPGA initiative. Their collaboration includes: (a) integration of FPGA debugging tools with Tornado IDE for Virtex-II FPGAs with embedded PowerPC 405, (b) development of a hardware reference platform, (c) integration of FPGA design tools with WRS tools, (d) runtime support for in-field reprogramming of FPGA device; and (e) hardware-software co-design.
In October, Wind River announced support of Motorola' newest Power PC architecture, a microcontroller used in automotive power trains. WIND"s hardware leverages the MPC565 technology with hardware-assisted debug tools, a compiler, and simulator that is fully integrated with the OSEKWorks RTOS and Tornado for OSEK tool set. A week earlier, WRS had introduced the OSEK product line that is now integrated into a Tornado development environment. Tornado for OSEKWorks is ported to the Mitsubishi M32R, Motorola PowerPC, HC12 and M*Cor, Infineon 167 and Tricore, and ARM, with more becoming available later this year.
Also in October, WIND announced that Tornado for Managed Switches (TMS) supported Galileo Technology's Fast/Gigabit Ethernet GalNet 2+ chip family. In addition to an IDE, TMS 2.0 provides a standard set of network management middleware, including QoS , IEEE 802.1p and 802.1Q protocols, VOIP, and VLAN. By offering software solutions integrated into Galileo's IC switch solutions, OEMs can reduce their development time by as much as two years.
Third, Value Added Resellers (VARs). WIND has over 30 VARs who sell embedded systems (or other enabling hardware or software) that pre-integrate WIND's software with their processor, core, or controller. Traditionally, the OEM's process steps have been: (a) select vendor, (b) integrate system, (c) develop application, (d) test product, and (e) manufacture it. The increased complexity and faster turns in processors, and, hence, the need for new products has pressured the system integration portion of the OEM cycle, expanding the time demanded from about 10% in 1995 to about 30% in 2000.
WIND convinced the VARs that they could add value to their hardware by shifting the integration burden from the OEMs to Wind River who, in partnership, would pre-integrate the hardware and software and offer a reference design for application development. Their VAR-partners bundle and resell Wind River's software and tools, collect and pay license fees directly to WIND, and often shield run-time royalties from the OEM. The OEM customers, which benefit from a drastic reduction in the system integration phase and in overall time to market, are attracted to VARs as vendors since they become free to focus on their own value add to their end product. Wind River: (a) benefits from greatly expanded business opportunities, (b) moves design wins upstream, (c) reduces costs of sales, and (d) raises competitive barriers to entry.
In January, ZF Linus Devices became a VAR by bundling VxWorks and a 60-day evaluation copy of Tornado with ZF's MachZ System-on-a-Chip for the Internet Appliance market.
In December, Virata became a value added reseller to simplify further the development of DSL equipment by offering an integrated hardware and software solution, its Integrated-Software-On-Silicon, which includes communication processors, ATM, frame, and IP protocols, voice processing, and DSL support, is now bundled with Tornado/VxWorks.
In November, Motorola became a VAR by integrating Motorola'a MCT5100 M-DTV module and VxWorks to provide a digital TV solution for TVs and set-top Boxes. This module converts ATSC digital TV signals to existing standard definition format, increasing the precision and clarity of the picture and enhancing its audio.
Also in November, LSI Logic joined Wind River's VARs to deliver a cost-effective turnkey solution for the switched Ethernet market. By embedding LSI Logic's 24+2 intelligent switch in TMS, their reference-design-solution offers such features as simple network management, web and console management, remote monitoring, 801.1Q VLAN, 802.1P priority queuing, IP multicast, port trunking, port mirroring diagnostics, per port security, and hot swapability on up links.
In October, NEC joined Wind River VAR program, integrating NEC's MIPS-based network controllers, and future derivatives, with Wind River's Tornado/VxWorks/pSOS software to provide solutions to the xDSL market, including SoHo routers, residential gateways, and set-top boxes. The WRS solution level DSL product includes features such as chip level device drivers, ATM, L2TP, multilink PPP, NAT, QoS, VPN, and V OIP. NEC GM Hareyama said, "VxWorks is the leading operating system choice among designers of network applications and we are pleased to be able to offer our worldwide customers this best in class software." |
