Cavium Acquires MontaVista – Embedded Linux Consolidation Continues
Yesterday semiconductor supplier Cavium Networks announced its plans to acquire embedded Linux pioneer MontaVista Software. MontaVista, founded in 1999 by Jim Ready (of Ready Systems / VRTX reknown) was among the first to commercialize and evangelize Linux for embedded designs. It was one of the few remaining independent vendors in the embedded Linux business when Cavium snapped it up yesterday for $16M in cash and $34M in stock.
When Silicon Buys Software and Services
The acquisition is the latest in a string of M&A moves by silicon vendors hoping to gain an edge in filling sockets by providing software tools, platforms and services. The most recent, most visible and most lucrative was Intel’s buy of Wind River earlier this year for a cool $884M, most palpably to support design-in of Intel’s mobile/embedded Atom architecture family. Others include
- Motorola Semiconductor (now Freescale) purchase of MetroWerks in 2003
- Mentor Graphics acquisition of Embedded Alley earlier in 2009 (Mentor helps companies design semiconductors)
Why MontaVista, Why Now?
Cavium’s stated reasons for the buy are to “complement Cavium’s market leading processor portfolio” and to “significantly increase Cavium’s software and services revenue”, which in 2009 could amount to a top-line bump of $30M according to Cavium’s investor call. Unstated are likely concerns about sustaining Cavium’s traditionally close ties with Wind River for design wins with popular Cavium MIPS architecture CPUs for networking and other applications.
MontaVista, for its part, has reportedly been courting suitors for three years or more, after multiple funding rounds that totaled over $100M since the company’s founding in 1999. The marriage with Cavium reflects the embedded Linux supplier’s long-standing ties to semiconductor suppliers, including AMCC, Freescale, Intel, Marvell, and Texas Instruments, and processor IP providers ARM and MIPS Technologies. Many were also strategic investors and sources of substantial historical enablement revenue. It also probably reflects the state of the firm’s revenues and cash reserves.
Analysis – Acquisition a Bang or a Whimper?
The acquisition is certainly a bang for Cavium. They get revenue growth, enabling technology, expertise and new ecosystem reach. But for MontaVista? They get financial security (for now) and a place in a strong and growing technology supplier. However, this acquisition surely falls short of the “event” once envisioned by Ready and his many investors.
MontaVista made a strong start in 1999 and 2000, riding the wave of infrastructure build-out to support what later turned into the Internet bubble. Even after that bubble burst, MontaVista continued to grow, complementing still-strong networking business with consumer electronics, mobile telephony and other intelligent device application segments. They achieved an impressive series of “firsts” in bringing Linux and open source software (OSS) to the embedded space:
- First commercial cross tools and fully embedded platform for Power, MIPS and ARM architectures
- First support for redefinable CPU architectures
- First to market with a Carrier Grade Linux platform
- First mass deployments in dozens mobile handset designs and millions of handsets with MobiLinux
- Key enhancements in real-time responsiveness of the Linux kernel
- Investment in maintaining Linux kernel architecture trees, including especially PowerPC and multiple ARM family CPUs
- Important advances in and contributions to open source projects, including the Linux kernel and device drivers, threading libraries, power management, GDBserver and numerous others
- Early support for embedded multicore architectures and designs
- Industry leadership in evangelizing embedded Linux and providing assurances about the IP safety of embedded open source
So why did an acquisition occur not at first, but at last? How was late starter Wind River able to enter the embedded Linux space in earnest after MontaVista’s five year head-start, and eclispe MontaVista in Linux-based revenues and ultimately in valuation?
For all of the company’s “firsts”, MontaVista took numerous missteps, slowing its growth and causing it to miss multiple windows of opportunity:
Value-added: for most of its history, MontaVista primarily acted as an integrator of OSS projects, treading water and often swimming below the ever-rising open source value line. True innovation emerged from the company, but always so low in the stack (mostly in the kernel) that they were unsuccessful in commanding a premium for it.
Revenue Scaling: Because they packaged up and commercialized a broad array of existing projects, and marketed them as development seats to engineers, MontaVista revenue growth was always limited by their ability to capture development teams as customers. They resisted both developing deployment IP or reselling run-time technology from 3rd parties, limiting their opportunity to benefit from successful high-volume OEM customer products. At one time the company did offer a per-unit licensing option for this aggregated open source content. Primarily a response to requirements for risk-sharing from key customers, this short-lived selling model baffled many in the industry who assumed that OSS code could only accrue services revenues.
Sustaining vs. Enabling Revenue: MontaVista cultivated strong ties to semiconductor suppliers and other hardware vendors, and was successful for many years in charging a premium for hardware enablement and upstream migration of patches and other code to support CPUs, SoCs and embedded computers. At various times, the company was more successful in extracting revenues for enabling reference hardware than for supporting OEMs in building product on those systems and silicon. The result of such strong business development was a product line bloated with board support packages that never saw the light of day in shipping OEM products but added substantial time and costs to new releases and sustaining engineering. This focus on enablement also served to alienate partners over time when they could not justify ROI for their NRE.
Business Model and Execution: Many MontaVista watchers have argued that the company’s business model was essentially flawed. Certainly there is room for debate about the viability of going to market with a product built almost entirely from freely available OSS components (vs. complementing that platform with proprietary IP, etc.). Such a model based on building with and for open source can devolve into less attractive high-overhead packaged service business in the face of a rising value line.
By contrast, I would argue that MontaVista insiders and its various detractors were in no position to critique the business model itself since that model (and its minor variations) was never really tested. The model did not fail the company, but rather the company failed to execute on that model.
Failure to execute belies key assumptions about serving device OEMs with embedded Linux platforms and toolkits:
- OEMs look to suppliers like MontaVista for productization of the latest Linux kernel technology, libaries, middleware and tools
- OEMs expect frequent releases and deep expertise at many levels of the platform and tools
- OEMs anticipate something “in the box” other than bits and bytes they can increasingly source directly from OSS project trees
While MontaVista made a strong start in all these areas, over time they reduced the investments needed to meet these (not unreasonable) expectations. In the last five years, MontaVista Linux releases became fewer and farther between and did not closely track ongoing Linux kernel and other OSS project evolution. The company lost most of its hallmark on-staff project maintainers, along with their insight and hands-on knowledge. And the firm never made sorely needed investments in truly original differentiating technologies and products.
In closing, I remember my first encounter with the company shortly after its founding in the Spring of 1999. I was doing a trade study of emerging embedded Linux with a colleague and we pondered the future of Jim Ready’s then-new company. Based on the history of Ready Systems and its flagship VRTX RTOS (acquired by Microtec Research for a modest sum in 1994) we debated whether this new venture would rise to spectacular success or ultimately stumble.
I guess we were both right.