Why Would Intel Need McAfee Inside?

Intel (Nasdaq: INTC  ) this morning announced that it would acquire security software provider McAfee for $7.68 billion. Once again, Intel breaks out of its core chip business, and throws quite a bit of money at the bet that future microprocessors will integrate security features by default. Intel's investments that are not directly related to its hardware chip business are a mixed bag of success, and the McAfee purchase is surely raising questions about the benefit for Intel, the implications for the chip and security software industry. Is this an expensive mistake, or will it reshape the future of processors?

If you are using 60% of your available cash and short-term investments to buy another company, you better make sure that it will work out. Considering its size, Intel's war chest is not exactly massive, and the volume of the acquisition is surprising. Intel has often tried to grow beyond its core chip business, for example with a rather strange line of MP3 players and toys in 2001, but they learned that it is difficult to change the existing perception of the company. Consumers tend to be confused when they are confronted with Intel products other than microprocessors.

Intel's goal has always been and always will be to increase its chip sales. Its venture capital arm, Intel Capital, carefully evaluates its investments with a look at the implications for its chip business, and recent acquisitions such as Wind River in 2009 always take a spin at an opportunity to drive more processor shipments. In that view, it is not immediately apparent how McAfee could achieve such a goal for Intel.

Platform Building Blocks
The value of a processor is not just measured in performance anymore. For about five years, Intel (AMD as well) has been integrating what it describes as "advanced" technologies into its processors. These technologies include virtualization support, virtual threading, dynamic clock rates and protected execution of software. If Intel is right, then malware protection could become the next advanced technology for CPUs that may provide extra value at least in some markets and may provide a competitive advantage.

For the traditional PC, it may be difficult to convey the message that a processor comes with malware protection by default. Not only may that raise eyebrows with users -- HP's Gaming CTO Rahul Sood tweeted this morning that McAfee is the first software he removes from a new PC -- but it may take Intel into antitrust waters as well. McAfee has deals in place that puts the software on all new Dell, Acer, Sony, Toshiba, and Lenovo PCs anyway. When the software is coupled with Intel processors, companies such as Symantec (Nasdaq: SYMC  ) may be questioning the move in an antitrust perspective.

For the consumer, it will be interesting to see, if Intel is integrating malware protection in its processors, how it will be marketing the feature. Will we have to rent microprocessor features in the future, and do you have to renew malware protection every year just like you are used to renewing AV software every year? For Intel, that could be a lucrative move, but I am not sure if our subscription society is quite ready to "rent" their processors. In the end, there may be a much more interesting way for Intel to leverage McAfee.

As the company tries to move into consumer electronics and mobile platforms, it may be among the first that is able to address security concerns. Attacks on smartphones are already surfacing and it is just a matter of time until Internet-connected TVs and connected cars will be exposed to attacks as well. The last thing you really want is that someone hacks your smartphone, your car, or your TV. If Intel can provide malware protection to manufacturers, it may have a very interesting value proposition that cannot be matched by default by its chief rival, ARM. To us, McAfee is not so much a PC deal, it seems to be a consumer electronics deal that may have some positive effects on the PC business as well. Robert W. Baird analysts stated that, "the acquisition was driven by the rising popularity of mobile devices, and need to provide security to those devices. Securing resource constrained mobile devices will require some security functionality being provided at the chip level, and some in the cloud."

Intel said it will be treating McAfee as a wholly owned subsidiary like Wind River, which means that McAfee keeps its name, and Intel simply appears in the About Us section of McAfee's website. Intel also said that McAfee keeps its headquarters and will be operating by itself. This will allow McAfee to retain its identity and its customers. About 50% of McAfee's revenue comes from maintenance and 40% comes from sales of subscriptions.

Risks
The security market has changed quite a bit over the past few years. Some companies, including Microsoft and AVG, are offering free malware protection applications, which could make it difficult for Microsoft and McAfee to sustain at least the consumer market model. McAfee has made recent moves to follow the trend to cloud computing and is now offering malware protection as software as a service (SaaS) as well. In the long term, Intel's move may contribute to the commoditization of security software, force companies such as Symantec to rethink their business, and force ARM, AMD and Nvidia to offer similar solutions.

A successful acquisition will ultimately depend on Intel's capability to integrate McAfee and leverage its R&D for its own products. In fact, McAfee's current profitable business model may be a bonus at this time, but it is unlikely that it drove the acquisition thought. The long-term prospect of McAfee's customers, reach into the market, and technology are much more attractive to Intel than short-term revenue opportunity.

Intel's future does not depend on this deal as much as AMD depended on ATI to be successful. It is an expensive gamble that bets on a growth of security threats on platforms Intel has not a great presence in yet. If the threat level on smartphones, tablets and TVs grows, Intel's investment will pay off quickly.

Intel spokeswoman Suzy Ramirez declined to comment on specific products that may result from this acquisition. However, she confirmed that the two companies have been working together for some time on products and the first results will be seen in new products that are scheduled for a launch in the first half of next year.

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Intel and Microsoft are Motley Fool Inside Value recommendations. NVIDIA is a Motley Fool Stock Advisor pick. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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