Project Network Effects: Wind River Systems (WRS; WIND) (cont.)
Part V. Competitive Environment and Progress to Date
Competitive Environment.
None of WIND's competitors approach its breadth of porting or its integrated software platform that includes serviceability for management, updates, and additions. They lack the engineers with the requisite skills to catch up or keep up. Supposed competitors like WinCE or embedded Linux lack either a real-time operating system or the engineering personnel trained to handle this workload, much less to keep up with the growing requirements for RASS and network management, much less to provide the level of professional service required to help OEMs design, install, connect, and manage many diverse applications.
Microsoft has a shrink-wrapped business model that simply does not port to the embedded business. WinCE does not offer the requisite reliability and determinism, nor does Microsoft provide the necessary level of service. Given its size, Microsoft must seek large markets that immediately impact its bottom line. Whereas, an open source code movement has no one in charge to rationalize the individual contributions to its burgeoning code; it lacks the standardization, documentation, service, serviceability, and guaranteed reliability of Wind River's solution.
Given Wind Rivers market dominance, why would another company choose to reinvent the tools and features in WIND's five layers of building blocks? How could they attempt this feat working only from open source code? It took WIND, beginning in 1981, hundreds of engineering years and counting to do it from scratch; and this does not include the contributions of the seven software acquisitions made in the last two years. It was hard enough for Wind River, who started with simpler processors, who selected the best route to a simpler goal, and who built their total solution a brick at a time. However, it would be far harder for a new competitor to start with more complex and rapidly changing semiconductors, and to be handicapped further by finding alternative routes around WIND's proprietary code, as they attempt to reach the highly complex and rigorous goals that have been created by the Internet. How can anyone afford the time and money to build a total solution from scratch when a solution to the OEM's development problems of complexity and time-to-market is already available?
And, if it were possible for embedded software engineers to build a high availability, memory protected RTOS from open source code, like, say, a high-featured embedded Linux, without any realistic economic incentive, why would they? And who would rationalize those millions of lines of codes for communication and connectivity coming from different authors? Their inevitable errors would be weighed against WIND's robust reliability. I believe WIND is past the time to worry about such new approaches as more than local in-house projects or potential niche competitors. Tornado tools will embrace Linux, like it did Java, which came before it. When WRS embraces embedded Linux, its functions will be extended to embrace serviceability and connectivity, becoming another RTOS within WIND's total solution. History will repeat itself. Once the fanfare that Java would take-over had passed, Java actually advanced best within the WRS framework; so too, will embedded Linux. Not only will Linux be embraced and extended, but also the IHP RTOSs.
How WRS Embraced and Extended Java. As an example of embracing and extending, look at the many advances Wind River has made in embedded Java. There success was recognized in December, when Wind River was elected to the Java Community Process's Executive Committee to represent the interests of embedded developers, including the 250 customers who use Wind River's Java implementations.
Since the introduction of Java in 1995, WRS led the effort to adapt Java to embedded devices, becoming the first company to offer a 100% compatible port of a Java Virtual Machine (Sun's PersonalJava) to an RTOS (Personal JWorks). WRS has about 48% of all Java design wins, more than any other JVM, with 37% using VxWorks and 11%, using pSOS. JavaPro readers voted their leading Java solution, Personal Jworks, plus TurboJ: Best Embedded Java Product of the Year 2000. To improve Personal JWorks further, version 3.2 included WindML 2.0, an ideal solution for developing device drivers, supporting graphics, video, and audio technologies and providing APIs for graphics, text, windowing, event routing, video overlays and audio. This new release gives Java-application developers high graphics performance, with speed that is 4 to 6 times faster than the default PersonalJava reference platform. Developers can leverage its capabilities to include complex user interfaces, including font engines and video support. The WRS TurboJ compiler provides a 10 to 25 times performance improvement on Java bytecode as compared to interpreted bytecode. Personal Jworks' unique Java application environment expanded the reliability, scalability, portability, small memory footprint, and performance of VxWorks to the advantage given by Java's "write once, run anywhere" approach.
Dedicated to improving their Java-based approach to digital consumer electronics, WRS bought AudeSI, a private company specializing in Java-based programming for portable electronic devices last March. AudeSI 's 50 employees developed a new technology that incorporated a Java-Bean application middleware for set-top boxes, gaming platforms, and Web tablets. This technology was incorporated into the WRS platform as WindStorm tools, including the WindStorm Simulator that allow OEMs to start on their product while hardware is still in development and WindStorm Device Management Framework that enable devices to be remotely monitored, controlled, serviced, and seamlessly updated. This integrated platform accelerates the delivery of Java-based Internet appliances by reducing complexity and time-to-market.
Also, when customers told WRS that IceSoft's browser was the best third generation browser, WRS purchased the Norwegian firm ICESoft in August for $ 25 million in cash. The Ice Browser 5.0 supports the latest Web standards, including XML, HTML, and Java Script that can be integrated into any application. The Web browser, E-mail client, and personal information manager can use the OEMs' customized interface. Its SSL 2.0 software permits secure transactions on the Web. The innovative ICE Storm Architecture uses two types of modules: (a) a pilot module for rendering content that is platform-independent and can be loaded dynamically, and (b) a scripting module that integrates the Pilots within a framework. A pilot module is a blend between a plug-in and an applet. While the ICE browser provides unprecedented levels of modularity, HTML remains central, and WRS is determined to provide the best browser, in addition to supporting all industry-leading fully compliant standards.
Moreover, Tornado for Internet Appliances is a Java-based IA platform with a portfolio of products to develop access devices such as Web tablets, screen phones, set-top boxes, PDAs, Kiosks, and point-of-sale terminals. Its integrated tools speed time-to market; its pre-integrated applications include the IceStorm browser, e-mail, personal information manager, multimedia plug-ins, a device management framework, a smart card interface, wired connectivity by both USB and Ethernet, wireless connectivity both by Bluetooth and 802.11b, and a complete hardware reference platform.
The TIA Web tablet Solution is another first for Wind River, because it contains a Hardware Reference Platform called StormPad, along with the following solution features: (a) Run-time software components, including VxWorks 5.4, Personal JWorks 2.1, WindStorm, and IceStorm Applications Suite (browser, Email, PIM); (b) Host software tools, including Tornado II Standard, WindStorm tools, simulation environment, Build tool, and Content management; and as Product hosts, Windows 98 and NT. WindStorm is a modular, lightweight, embedded software layer that enables rapid development, deployment, and management of Internet Appliances, using a client/server architecture that builds on the traditional advantages of Java.
StormPad features include: (a) a core consisting of a SA 1110 206MHz microprocessor and BSP, dual PCM/CIA cards, 32 MB Flash and RAM memories, and more; (b) both wired and wireless connectivity, plus multimedia support; and (c) a User Interface, including LCD, full VGA 7.7", CRT Support, Touch screen, Roller Ball plus five feature and 2 mouse keys, Stereo Speaker, Microphone, Headset Jack, and Ir Keyboard. This hardware reference platform will speed OEMs, particularly start-up OEMs on their way. (This may be the Web tablet that Craig Barrett, CEO of Intel, used in his recent demonstration on extending the PC, or it may just be one developed by Intel with WIND inside.)
These performance improvements in embedded Java cannot be matched by Sun because embedded software is neither their core competency nor value proposition; so, Sun, in effect, "outsources" more and more of it to Wind River, the embedded specialist. Thus, I believe that Java's history will be repeated, not only by embracing and extending embedded Linux but also with in-house proprietary RTOSs.
For example, in August, WRS announced that Sony was using its software in its first Network Walkman. In the EE Times of January 8, 2001, Toni Aoki, Director of Business Development at Sony Network Entertainment of America commented on why Sony selected VxWorks rather than using their IHP Aperios RTOS in up to 3 million Cablevision set-top boxes, "After evaluating a variety of operating systems, and the availability of tool sets, we decided to use VxWorks. Time-to-market was the most critical factor in this decision." Also, recall that the Palm's OS now incorporates Wind Rivers' version of the TCP/IP stack. Complexity and TTM accelerate the growing dominance of WRS.
Progress at Wind River.
In CY2000, Wind River strengthened and expanded its product portfolio, strengthened and added to its value chain, increased its architectural control, began the process of integrating Integrated Systems and three subsequent acquisitions, and began restoring of its operating margins.
Beginning with acquisitions, Wind River announced the completion of its ISI acquisition and unveiled its unified product and business strategy in February. WRS announced the acquisition of Embedded Support Tools in late February, completing it in early April. In March, WRS acquired AudeSI to gain additional Java and Internet Appliance expertise. In August, WRS acquired ICESoft for its expertise and embedded Internet browser for Internet Applications. In October, WRS announced the acquisition of Rapid Logic, and WRS integrated the Dragonfly MIPS development team.
WRS made the following product announcements, from January through December: (1) with Intel, announced IxWorks for I2O and iRAID; (2) shipped Tornado for Managed Switches; (3) delivered "plug-n-play" WindNet networking protocols; (4) unveiled first complete Java architecture for development, deployment, and content management of IAs; (5) expanded hardware-assisted tools for MIPS, Hitachi, and ARM processor families; (6) introduced next-generation pSOSystem/pRISM+; (7) unveiled certified software for DO178B Airborne Systems; (8) delivered multimedia and graphics solutions for smart devices; (9) introduced VxWorks AE and Tornado Tool 3; (10) unveiled Bluetooth stack for wireless connectivity; (11) delivered a new Java solution incorporating ICESoft products; (12) unveiled Tornado for Managed Switches 2.0; (13) unveiled Tornado for Intelligent I/O 2.0; (14) rolled-out complete Tornado for Internet Appliances portfolio; (15) introduced OSEK product line for automotive applications; (16) extended first-to-market hardware-assisted tools to Motorola MPC565; (17) delivered latest version of SNIFF for large scale software development; and (18) unveiled MATRIXx 7.0 for automotive and aerospace software controller design.
Thus, WRS's commitment to offer a complete end-to-end software solution took many giant steps toward realization in 2000, including penetrating deeper into hardware-software pre-integration, adding network management and serviceability capabilities, adding sophisticated Java browser and management solutions, extending network protocols and Bluetooth connectivity, strengthening VxWorks AE by introducing RASS and memory protection, and strengthening sever advanced Tornado platforms for niche markets by adding middleware and communications protocols.
Evidence for strengthening its value chain included: (1) joined HAVi , a group that is setting standards for digital consumer appliance, to represent embedded systems; (2) rolled-out Center of Excellence with Intel for Pentium III and Celeron processors; (3) with Tensilica, created first RTOS and IDE for configurable processors; (4) invested in Highlander Engineering's Embedded CORBA runtime software; (5) joined Intel's Applied Computing Platform; (6) opened CoE with MIPS Technology for RISC processors; (7) opened CoE with Hitachi; (8) expanded CoE with Intel to cover Xscale and StrongARM microarchitectures; and (9) partnered with Xilinx to provide software for designing and upgrading platform FPGAs; and (10) formed WindVentures and invested in Zaffire and Tvia; and (11) added about ten companies, including NEC, Motorola, and LSI Logic to it value-added reseller program.
Not only did Wind River strengthen its value chain, it gained increased control over its architecture by (a) beginning to integrate and, potentially, co-create software-hardware in tandem through centers of excellence, (b) extending its products from pre-integration with hardware, through added-value in its tools and middleware, to managing, servicing, and seamlessly updating embedded systems, (c) advancing its lead and deepening its features in the Java-based world of smart devices, and (d) increasing the range of connectivity to include wireless options. Wind River can continue to add features to it RTOS and IDE's to keep competitors off-balance and catching up, but its breadth of portability and close relationships with CoEs and VARs gives it control over its COTS competitors, potentially even over its IH legacy competitors. The 600 WindLink partners are already controlled in the sense that they must adapt their product to those of WRS to participate in its network effects. The ability to link, manage, and up-date software is so valuable that it creates a means of control-as-mastery over WIND's entire value chain. If WIND's solution is the best of breed and is widely adopted, then these indirect and direct network effects will amplify its competitive advantage as a universal and ubiquitous enabling solution. History teaches us that a software company with this kind of advantage often dominates its value chain.
As for financial metrics, Wind River is improving, but it has not yet arrived. With 74.3 million shares outstanding and a price per share around $36.00, WIND has a market capitalization of about 2.7 billion. Pro Forma revenues in FY 2001 were $92 M in Q1, $101M in Q2, and 115M in Q3, increasing yoy from about $84 million. Revenue growth for FY2001 is estimated (including Q4) to increase by 38%, compared to 19% growth in FY2000. WIND has advised analysts to attend to its operating margins, which have been impacted by acquisition but are slated to return to historical level of 20% in the latter half of 2002. Operating margin were 3.7% in Q1-01, 6.4% in Q2, and 9.5% in Q3. Run-time royalties, which were down in Q2, rebounded to $25.9 million, up 47% sequentially. WRS has a price to book ratio of about 4.0 and a price to sale ratio of 6.58.
Wind River's return of operating margins to historic levels and the release of its Cumulus edition of VxWorks, a full integration of pSOS and other acquired software into VxWork AE and into a new version of Tornado IDE will mark the end of this transition period in product expansion, market penetration, and revenue growth have been WIND's primary goals. Investors may want to consider WIND seriously once the transition to the new Wind River is completed. |
