Thursday, July 30, 2009

Welcome, Mentor Graphics. Seriously.

What Happened?

Mentor Graphics announced at the Design Automation Conference a new strategy to target the next generation of mobile and non-mobile Linux devices. This expansion into the embedded Linux market will be supported by their acquisition of Embedded Alley, an embedded Linux product and services firm headquartered in San Jose with development offices in Russia. Oddly enough, no terms of the acquisition were disclosed as part of the announcement.

Similarly to IBM’s entrance into the PC market over twenty-five years ago, the magnitude of recent commitments to mobile Linux by tech industry stalwarts Google, Intel, and now Mentor Graphics help to validate Linux as a consumer-facing embedded operating system.

VDC’s View

Mentor’s market share in the embedded and real-time operating systems market has eroded over recent years, particularly with respect to its business in the mobile phone market and their inability to scale revenue from the no royalty-based Nucleus operating system in hundreds of millions of cell phones.

At the same time, advances in semiconductor technologies and the continued reductions in the cost of memory have allowed many device classes to deploy larger footprint embedded operating systems, such as Linux, than previously possible. Moreover, the Open Handset Alliance and the LiMo Foundation have generated a substantial amount of interest in and momentum for Linux as a mobile phone OS.

This acquisition signifies a renewed focus on the embedded software market as Mentor’s core EDA market stagnates. Much of the upside for Mentor, however, resides beyond mobile in the other application classes, such as telecom/datacom and military/aerospace, where their Nucleus RTOS is also widely deployed. Mentor can now offer their current and potential clients a choice or combination of operating systems to meet their varying project requirements.

Conversely, while a Linux offering will certainly aid Mentor’s embedded software value proposition, they acquired a company focused on professional services. As such, much of the acquisition’s value rests on the talent and retention of Embedded Alley’s team.

Although professional service capabilities continue to gain importance in the commercial embedded Linux market, Mentor has never had much services revenue around its traditional product offerings. As a result, we expect that Mentor’s ability to support and expand their professional services will ultimately dictate the success of entrance into the embedded Linux market.

The timing of this announcement is also rather fortuitous for Mentor given Intel’s recent acquisition of Wind River Systems. Wind River’s acquisition not only validates the growing importance of Linux in embedded systems, but it also presents other market participants with an opportunity to capitalize on any of the ensuing uncertainty or reevaluation in the market around Intel/Wind River’s support for non-Intel architectures..

This announcement is, in fact, just the latest action in a string of moves by other operating system vendors over recent years to offer Linux in addition to a proprietary real-time OS solution (i.e. Enea, LynuxWorks, SYSGO AG, and Wind River Systems, etc.).

In similar fashion to Wind River’s recent gains in the embedded Linux market, Mentor’s new offerings may allow it to recapture lost customers who had previously migrated from Nucleus to Linux as well as attract new device designs where Linux is a requirement. As a result, we expect that the collective smiles at MontaVista Software that appeared after Intel’s announced acquisition of WRS may be more tempered as they come to terms with the entrance of another deep-pocketed competitor offering Linux support.

Although Mentor was late to the party, it may turn out that they were just in time. In either case, welcome, Mentor Graphics. Seriously.