Intel-WindRiver: What the Merger Means

As software and hardware technology converge in non-PC computing, more partnerships are likely between chipmakers and software makers

By Olga Kharif

Clearly defined lines between the software and hardware worlds are getting fuzzier. The most recent evidence came on June 4, when Intel, the world's largest maker of computer chips, said it will buy software maker Wind­River.

Expected to close this summer, the $884 million acquisition not only pushes Intel (INTC) deeper into the market for a wide range of non-PC machines, but it's also likely to shake up long-standing tech alliances and could prompt more deals among makers of hardware and software.

For years, software makers such as Microsoft (MSFT) operated independently of chip manufacturers. But as computer technology gets woven into a larger array of machines, including smartphones, robots, and even cars, there's an urgent need for closer cohesion between hardware makers and developers of software, which in many cases fails to mesh well with increasingly powerful and speedy chips. Apple (AAPL), which specializes in making machines and the software that runs on them, last year acquired chipmaker PA Semi.

Intel has dabbled in software through its software-and-services division for the past 15 years, but the unit has never made money and exists mainly to support sales of related chips. "We know how to build and deliver software profitably," says John Bruggeman, chief marketing officer at WindRiver, the world's largest maker of non-PC computing software.

non-pc computing is a fast-growing market

With WindRiver, Intel wades more deeply into a large, lucrative market that includes robotic gear, smart wireless routers, and in-car entertainment systems. Until now, Intel has generated annual sales of about $1 billion, a fraction of its total last year of $37.6 billion, from non-PC machines. But non-PC computing—a category that excludes smartphones, netbooks, and traditional computers—generated $900 billion in sales in 2007, according to consulting firm IDC. That makes it four times larger than the market for PCs, and it's growing almost twice as fast.

As Intel moves onto new turf, it's also likely to sell its own chips to existing WindRiver clients, which include Alcatel-Lucent (ALU), Boeing (BA), General Electric (GE), Raytheon (RTN), and Samsung Electronics. If Intel can offer WindRiver software with its chips at a reasonable price, "there'll be few companies that won't buy it [from Intel]," says Richard Williams, an analyst at Cross Research. That poses a potential threat to rivals such as Freescale Semiconductor, Renesas Technology, and Texas Instruments (TXN).

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