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Intel-McAfee Deal Makes Secure Hardware a Priority

http://www.pcmag.com/article2/0,2817,2368031,00.asp

By: Mark Hachman
08.19.20100 comments

Intel's decision to buy security software giant McAfee for $7.68 billion on Thursday will add a "third pillar" of security to Intel's product portfolio, generating the possibility of short-term product combinations and a longer, more fully-formed integration of security, analysts said.

For its part, Intel remained vague on what products the combination would produce. On a conference call, executives said that the "first fruits" of the partnership would be released in early 2011. (PCmag.com's Neil Rubenking thinks that secure hardware will be the result.)

The deal underscores a quiet shift at Intel, from what has been a traditional focus on semiconductors to what chief executive Paul Otellini referred to Thursday as a "computing" company. Although Intel's software and services division is dwarfed by the revenues from its CPU business, Intel has beefed up its solutions business, purchasing embedded OS developer Wind River in 2009, its largest purchase in software to date. Intel has also quietly purchased RAD GameTools, Havok, CILK Arts, Virtutech, and other software companies over the years.

(Intel's next-largest acquisition, a $2.2 billion deal of networking silicon vendor Level One, was completed in 1999.)

Intel has also made software a vital piece of its efforts to win in the tablet and handheld devices space, though the development of the MeeGo operating system with Nokia and the Intel AppUP application store, noted Greg Richardson, an analyst with Technology Business Research.

And Intel has already built in hardware-based support for virtualization, a technology that isolates operating systems and processes from the rest of the server, preventing any flaw or malware from infecting the rest of the system. It's possible, some said, that Intel might look to its Xeon processor for a short-term enterprise collaboration while it develops its integration strategy further.

The deal still requires the approval of the government. When the deal is closed, McAfee will become a wholly owned subsidiary of Intel, reporting to Intel's software and services group. It will be managed by Renée James, Intel senior vice president and general manager of software and services. McAfee representatives deferred comment to Intel.

With McAfee, however, Intel has signaled that it may see security as important, as, say, graphics, a capability Intel began integrating into its core PC microprocessors with the introduction of the Core i3 and Core i5 chips earlier this year. In March, for example, Intel chief technology officer Justin Rattner appealed to Otellini to emphasize security, PCmag.com exclusively reported, offering Otellini a "mandate to change the world".

"We believe that security is most effective when enabled in hardware," Otellini said Thursday.

Analysts on the conference call seemed confused as to why the two companies decided to combine themselves, rather than spin off a joint venture or even establish a long-term partnership. Intel's stock fell 3.32 percent, or 66 cents, to $18.93.

Otellini, James, and Dave DeWalt, president and chief executive of McAfee, laid out the rationale for the acquisition in a conference call Thursday morning. The two companies have worked together for roughly 18 months, James said, and the two companies "know, trust, and respect each other". But, she added, "the threats and opportunities are simply too large to tackle alone, and that's why were here today."

Multi-segment impact

It appears that the merger may affect Intel on several levels. First, Intel executives said that they remain committed to the existing suite of McAfee consumer and corporate anti-malware and security products, including McAfee Total Protection, McAfee Antivirus, McAfee Internet Security, McAfee Firewall, McAfee IPS, as well as the company's expanding product line to cover mobile devices such as smartphones. Second, McAfee will most likely be asked to secure the Wind River operating system and other embedded products, according to a blog post by Goerge Kurtz, McAfee's chief technical officer. And finally, there is the long-term integration both on Intel's core processor lineup as well as in the handheld space, which will most likely require a number of years to fully realize, analysts said.

Some analysts wondered whether the combination would allow Intel salespeople to sell security software to PC OEMs alongside its chips, a practice known as bundling. Historically, bundling has involved Intel's Centrino products, which combined a processor, chipset, and wireless chip for one lump sum. However, Intel's Otellini said that the two companies "were not looking at bundling products per se". Bundled prices that harm competition are also one of the constraints of an Intel-FTC consent agreement, and the FTC has said that it can and would levy fines for violations of that agreement.

A spokesman for the FTC said that the agency could not confirm or deny that such an investigation would take place; the FTC has 30 days after the proposed merger is filed with the SEC to ask for additional information. The Department of Justice's antitrust division can also examine the proposed merger, although the FTC's recent investigation would make it the more likely agency.

According to James, the way to think about the integration would be in terms of "enhanced security solutions that can be hardened," which would suggest a software solution with hardware support. Intel will continue to work with other security vendors, Otellini added.

The integration with Intel's existing embedded software may in fact be the easy part, at least technically.

"You may be surprised that Intel has a software group, when you commonly think of them as a hardware company," George Kurtz, chief technology officer for McAfee, wrote in a blog post on Thursday. "In fact, McAfee is a perfect fit with the Intel acquisition of Wind River, a leader in embedded and mobile software.

"McAfee's strategy of protecting the multitude of devices such as ATMs, printers, digital copiers, and cars fits with helping organizations better manage and protect the IP enabled mobile and embedded devices that run Wind River embedded and mobile software," Kurtz added. "This also dovetails nicely with McAfee's acquisition of Solidcore, a leader in dynamic whitelisting technology that already provides protection for millions of embedded devices."

Historically, however, Intel has struggled with software, according to Andrew Jaquith, a security analyst for Forrester. Jacquith noted that Intel bought XML processing developer Sarvega in 2005, and made it "irrelevant," he wrote Thursday. In 1991, Intel bought LANDesk, then sold it. "Perhaps the most troubling part of the McAfee deal is the prospect that they will mismanage their new division into irrelevance," Jaquith said.

According to Intel's James, security solutions will be extended to Intel's embedded Atom in the near future, allowing Intel to pitch the Atom as a secure processor, capable of withstanding future attacks.

Intel formed the Trusted Computing Group with partners AMD, Hewlett-Packard, IBM, and Microsoft in 2003 with the goal of developing a trusted platform module that would sit alongside chipsets; later, Intel brought some of those capabilities inside its vPro enterprise components. Intel already markets secure capabilities such as a "remote lockdown" capability to prevent a lost or stolen PC from being used.

One problem, Jaquith noted, is that those security issues may be less relevant in a world of more tightly engineered mobile operating systems, where Intel is targeting its Atom and Wind River solutions.

"PC devices, and by this I mean those running Windows, have long needed third-party security vendors to help secure the platform," Jaquith wrote. "Early versions of Windows, and even current ones, were not designed with security in mind. Even though Windows 7 is much improved compared to Windows XP, 95 or 2000, the core OS is still based on the Win32 foundation, a twenty-year-old legacy that was designed to run on "everything." Contrast that with the highly sandboxed, compartmentalized, digitally signed "apps" model of the BlackBerry OS and Apple's iOS. With these two operating systems, you don't need on-board anti-virus, or HIPS, or anything else — and if you do, it is because Apple or RIM have screwed up. Both of these vendors are taking responsibility for their platforms in totality in ways that Microsoft never did, or could have. Neither iOS or BlackBerry OS depend in any way on hardware capabilities Intel or anybody else could bring to the table, other than the root-of-trust embedded in the handset; all of the security differentiation is is in the OS. And that, frankly, is where it belongs."

Tying McAfee's security to Intel's computing platforms will require time; the integration of graphics and microprocessor has taken years to develop, even at companies like AMD and Intel that have already had both capabilities in house.

"A deep collaboration is a few years out," said Andy Bryant, Intel's former chief financial officer and current chief administrative officer, during the call. Intel's current CFO, Stacy Smith, is on sabbatical.

And to enable that long-term development required more than just a than a development agreement, one analyst noted. "That type of security integration wouldn't be possible with the two companies having something like a bull session," said Nathan Brookwood, an analyst who has followed Intel's chip business for years.

Brookwood said that the the 2006, $5.4 billion combination of AMD and ATI Technologies, which brought PC graphics into the AMD fold, would simply not have worked as a technology partnership; there would have been thorny questions on who owned what intellectual property, as well as the chip itself. But Brookwood also said that he had had conversations with Sun Microsystems engineers following Sun's $7.4 billion acquisition of Oracle last year. The acquisition allowed for close collaboration on future products, those engineers said, which will contain dedicated logic for accelerating the types of database products Oracle manufactures, according to Brookwood.

"Intel has scads of intellectual property, as we all know: lots of different areas in system design, buses, you name it – stacks of patents," Brookwood said. If Intel works with third parties, they have to be careful not to divulge features of upcoming processors and other confidential information., he said.

"There isn't an intellectual property problem if you're all part of the same team," Brookwood said. "If not, you're at arm's length."

Effect on rivals
So what does this mean for companies like ARM and AMD, Intel's rivals in the chip business?

"As devices becoming increasingly mobile, demand for security is on the rise. Any device that is able to interact with the Internet is subject to security concerns," TBR's Richardson said. "By embedding McAfee into its processors, Intel is building a stronger baseline of security. As a result, we expect Intel to tout the security as a key differentiator against traditional competitors such as Advanced Micro Devices, as well as newer challengers such as ARM, giving Intel a longer runway for growth."

Although the number of security vendors numbers in the teens, the possibility that a company like AMD may acquire one is probably remote, Brookwood said. After spinning off its money-losing foundry operation last year, the company is still flirting with profitability. AMD needs to concentrate on continuing to deliver its products on time.

"I would be shocked, shocked, if AMD said, 'Oh hey, we're buying Norton,'" Brookwood said.

AMD officials did not respond to a request for comment.