Aug 22, 2010

Discovering Economies Of Scope in Technology




  There's this interesting joke that I came across in Seeking-Alpha "Intel bought McAfee because the bloatware that McAfee sells is second biggest driving force for CPU upgrades after Windows. And CPU upgrades are good for business at Intel"
    
     Its a strange acquisition in many senses.. Intel paid a huge premium ( 60% premium @ $48 per share in an all cash deal worth $ 7.7 billion in cash ).. Never heard of a tech-acquisition that big in recent times.. Even the big buys made by Oracle were a mix of cash & share options. So, what made Intel buy McAfee which runs a seemingly unrelated business of anti-virus & security software ?
   
     To understand this in a better way, there was this interesting debate between Steve Jobs @ Apple vs Adobe..It was over the unsuitability of flash for iphone..The letter by Jobs is still given on Apple site .. A lot of points in this debate are on open vs closed systems.. But there is this point related to hardware given by Jobs - "To achieve long battery life when playing video, mobile devices must decode the video in hardware; decoding it in software uses too much power" ..Jobs' argument is in a different domain..But the implied point is that, as electronics on these domains advances, more and more functionalities move into a hardware domain from a pure software related side..Audio was the first one, Video controllers built into chips were next and Security related functionalities may be the next


    During my engineering course, we were taught this interesting observation called 'Moore's Law' ( Gordon Moore was one of the co-founders of Intel ) .. It observed the number of transistors per square ( and consequently, the processing power)  inch on an Integrated Chip doubled every year.. This rate of growth has been rather slow over the last 5 years or so. If you compare the PC processors that Intel has been doling out, even though they have been boosting the speed, there is very little value add for a normal person.. In other words, unless I'm a gaming freak or a graphics designer or some specialized application user, there is very little need for me to buy a latest Intel processor based PC/laptop.. Intel has been unable to make any significant progress on a 'value addition to a normal user' over the past few years..And thats reflected in their cash-rich balance sheet ( They have a cash balance of $18.3 billion it seems ) 
      
      So, basically Intel is trying to bring new value at a hardware level.. As the processor speed based game kind of leveled out, Intel needed to do something innovative or special to keep its hold on the consumers.. In other words, they are searching for new economies of scope by buying McAfee..
       To be fair to them, this acquisition is just a no-loss experiment.. For, there is no better way to use their huge cash reserves ( maybe other way was to give out huge dividends ) ..And even if they fail to integrate McAfee technology to the chips , they are not going to lose out as McAfee themselves have a stable business. 

4 comments:

rakuboy said...

wow! had no idea Intel was sitting with such huge cash reserves..
good article btw..

Anonymous said...

It was very interesting for me to read the blog. Thanx for it. I like such topics and anything that is connected to this matter. I would like to read a bit more soon.

Anete Hakkinen

Anonymous said...

Good One...

Deepak said...

I agree and disagree.
Agree about the security stack moving from SW to HW.
I disagree about your "bringing new value"
It is more about where the market as such is moving.
Intel is investing heavily on the mobile processor and SoC market these days, although the main cash cow is still the CPU.
And the need for security in mobile SoCs is becoming more and more obvious as the user base is increasing drastically because of iOS, Blackberry and Android.
The strategy of acquiring McAfee is aimed more at the SoC market rather than the CPU market.