CASE: OD-3A DATE: NOVEMBER 21, 2002

WIND RIVER SYSTEMS (A)

Jerry Fiddler and Tom St. Dennis sat in their adjacent corner offices on November 4, 2002 in Wind River’s Alameda, California headquarters and pondered the future of the embedded systems market. Embedded was that which runs a microchip or smart device and was dedicated to performing few functions repeatedly without fail. St. Dennis and Fiddler were planning a reorganization to reposition Wind River as a strategic, enterprise-wide outsourcing partner with their clients instead of a market-specific software provider, an important move to facilitate growth and build lasting client relationships. They knew their customers needed an easily-integrated, highly tailored package that included professional services, but did not know how effective the reorganization would be, or if their clients would welcome the “new” Wind River.

This was not the first reorganization the two had engineered at Wind River. Three years prior, only weeks after St. Dennis was hired as CEO, he and Fiddler, co-founder and chairman, had shifted the company from a horizontally organized software products company to a vertically organized market-specific bundled products company. The move from a horizontal organization (product teams grouped by technology) to a vertical organization (product teams organized by target industry) was an expensive maneuver that had not yet paid for itself.

The competition was like nothing they had faced before. On the one hand, they faced niche players in each of their target vertical markets, which included aerospace and defense, automotive, network telecommunications, digital consumer products, and industrial controls. On the other, they faced the potential threat of and the open source software movement. And there were their customers’ internal development teams, many of whom continued to design embedded systems in-house. This, combined with the slumping economy, would make it difficult to grow to implement their new strategy.

THE EMBEDDED SYSTEMS MARKET

Greg Powell prepared this case under the supervision of Professors William Barnett and Glenn Carroll as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Special thanks to Ted Hartnell for his help in facilitating this case. Copyright © 2002 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.

Wind River Systems OD-3A p. 2

Embedded systems were those that ran the microchips in all “smart” devices. Devices such as cell phones, auto antilock braking systems, oscilloscopes, and network routers all required embedded operating systems. Unlike the operating systems in PCs (such as Windows), embedded systems were transparent to the user and were usually required to perform one function unfailingly countless times. Embedded systems were therefore measured against their reliability (the more reliable the system, the less downtime it would suffer and the more “mission critical” it could be), speed (the less processing overhead there was, the more reliable it would be), and memory (the less memory, or “footprint,” the system required, the less expensive it was). More complex devices often had more than one , each dedicated to performing specific tasks consistently and repeatedly in coordination.

Through 2002, embedded systems represented a vast majority of the processing chips made each year. It was estimated that almost 7 billion running embedded software were sold in 2001 and over 10 billion would be sold in 2005.1 The combined commercial and in-house embedded software market was estimated at $23 billion for 2002. Of this, commercial embedded development accounted for roughly 9 percent, or $1.7 billion, in 2002.2 Wind River’s revenue for fiscal year 2002 was $351 million. In 2002 and during the preceding decade, Wind River was the market leader in designing commercial embedded systems.3

The commercial embedded software industry was smaller than $100 million annually when Wind River entered. Original equipment manufacturers (OEMs) typically developed code for their microchips in-house. When Wind River first launched VxWorks, their value proposition to the OEMs was reduced costs with increased speed and reliability. Eventually, as customers began adopting VxWorks, and as more competitors to Wind River emerged, embedded software became a recognized industry.

There were three main components to embedded systems: the OS itself, the interactive design tools that facilitated software development, debugging, and integration, and the . Tools, also called Interactive Developer Environment (or IDE), provided a setting for creating the application software specific to each customer’s product. Tools eventually split from the as its own sub-market within the embedded space. Wind River’s tools, called Tornado, came bundled with their operating system though clients could purchase different quantities of OS licenses and tool sets. The Tornado tools were among Wind River’s top-sellers annually, accounting for roughly 40 percent of revenue. Tools also embodied a distinct competitive advantage for Wind River, as Tornado represented years worth of intellectual property and research and development – something that had been argued Wind River’s competitors could not replicate. Middleware, or OS extensions, consisted of all of the remaining components to an , such as the graphics, memory, and networking packages, which tailored the system to a particular client’s needs. In 2002, much of the perceived value to an embedded system resided in the middleware, as it left fewer components for the client to develop or integrate on their own.

1 Don Young and Gerry McCormack, UBS Warburg LLC Analyst Report, July 18, 2002, p. 18. 2 McKinsey & Company and Wind River Systems, Building a New Business Model to Drive Enterprise Growth, September 26, 2002, Property of Wind River Systems, prepared by McKinsey & Company, p. 2. 3 Young and McCormack, op. cit., p. 18.

Wind River Systems OD-3A p. 3

In 2002 the embedded software market could be divided into five categories: Wind River, in- house developers, Linux developers, niche-market developers, and .

In-House Proprietary Developers

In 2002, in-house embedded software developers accounted for roughly 90 percent of the total market.4 While that number was expected to shrink as outsourcing became more popular, when devices grew more complex and embedded systems, therefore, became more costly to develop, the in-house proprietary market nonetheless represented the most substantial piece of the embedded market.

Often companies would develop an embedded system in-house when they could not find a commercial alternative that met their unique specifications. A commercial embedded developer might sell the appropriate operating system and tools, but if the system lacked the necessary middleware, the company would need to employ their internal development team to integrate the entire package regardless. Thus, some would skip buying the components and design the entire system themselves.

Many companies cited two competitive reasons for pursuing their own proprietary embedded OS: they owned all of the intellectual property, and it was very difficult for competitors to duplicate in-house development. If they were to outsource this development to a company like Wind River, Wind River could sell a similar solution to their rival competitor, thus eliminating many of the advantages that the software might bring to their product. Other companies choose in-house development to control costs. These companies often already had the expertise to design an embedded OS, and they simply took advantage of these resources.

The drawback to in-house proprietary development could be the cost over time. Maintaining the OS, adding functionality, and keeping the software cutting-edge could be very expensive and time-consuming. One Wind River manager agreed, stating, “Time-to-market and development costs are the drawbacks. They’re re-inventing the wheel and they’re not getting best-of-breed. As you’re spending all this time integrating and building platforms, you’re losing time. Cisco claims that one month delay in time-to-market is equal to 14 percent of market share. That’s huge.”

By 2002 in-house proprietary developers began using Linux as the starting point for designing a proprietary embedded system increasingly often. Developers could download the Linux kernel, or core code, for free. They could then develop their own code around the Linux kernel.5

The Rise of Linux

Linux, the open source software, gained inroads into the embedded systems world in 2000. The rise of Linux in the embedded space could largely be attributed to the dedicated community of anti-proprietary software developers, the in-house developers looking for a starting point for source code, and the eagerness of some corporations to use software they could leverage across platforms.

4 McKinsey & Company and Wind River Systems, op. cit., p. 2. 5 At the time of writing, the amount of Linux-based in-house development was unknown.

Wind River Systems OD-3A p. 4

Linux is an operating system designed by Finnish software developer Linus Torvalds. He wrote a kernel modeled after the one in AT&T’s proprietary UNIX operating system, attempting with a community of enthusiastic engineers from around the world to create an open source alternative to Windows.6 “Open source” in this case meant that the operating system kernel was free for anyone to use at any time. Developers who used the kernel could create anything from it for free, but they were required to give their new code back to the community. The kernel was protected under the GPL, or GNU General Public License (GNU is a recursive acronym meaning “GNU is Not Unix”), which stated that any changes made to the kernel were thenceforth under the jurisdiction of the GPL and deemed open source.

There was contention, however, about how to interpret the GPL’s impact on embedded Linux development. Some said that only the kernel itself was covered by the GPL, and that changes to the kernel alone must be given back to the community; anything else was still proprietary. A Linux industry insider had the following to say on the GPL and its impact on commercial Linux development:

The GPL is crystal clear on this: applications and software programs that run with Linux are not required to be released under the GPL and there is no risk of contamination. Let’s say you have a cell phone application with a great user interface and fifteen different applications that run on the user interface. None of that has to be released under the GPL. Running that under the Linux GPL is no more risky than using any commercial OS. Companies are starting to understand that now.

Linux software developers such as , Monta Vista, and LynuxWorks shared the insider’s opinion and attempted to license software and provide services under the assumption that they did not need to give code - other than a modified version of the kernel - back to the community.

This was also where many companies took their in-house embedded OS development. Their engineers could simply download one of many versions of the Linux OS that they needed to start developing a customized solution. Since this could be done free of charge, companies considered Linux an inexpensive route to designing a proprietary solution.

However, others claimed that the GPL required that any software that touched the kernel must become open source. This was an important detail for embedded operating systems, as most embedded software occupied space near the kernel. Jerry Fiddler wrote, in his 2002 Wind River white paper on embedded Linux, that the GPU “requires, among other things, that if you create programming based on software you got from the open-source community, then the modifications you make or the software you create have to go back to the community so everyone else can use them also.”7

Many, such as Fiddler, were convinced that Linux would not remain a threat to commercial development. There were costs associated with Linux that companies inevitably incurred,

6 Farhad Manjoo, “Linux, a Decade of Open Source,” Wired News, August 25, 2001. 7 Jerry Fiddler, Linux In Embedded Systems: Where Are The Benefits? Wind River Systems, 2002.

Wind River Systems OD-3A p. 5 including development costs, along with maintenance and updates. Additionally, Fiddler believed, the GPL would become too big a risk for corporations who feared either giving up their software code to the Linux community or litigation surrounding the GPL.8

GPL aside, it was important not to underestimate Linux supporters. Their devotion to the open source movement was fervent and had never had such a widely used platform, such as Linux, before. Additionally, many of them held decision-making roles for embedded systems development. Indeed, the number of firms who used embedded Linux grew significantly in 2002 to almost 15 percent, and was expected to surpass 30 percent in 2003.9

Linux technology was viewed by many to be ideal for companies looking to leverage software platforms across products. They could do this by adopting it as the platform of choice for the entire corporation, like a few consumer products companies had done. Additionally, semiconductor manufacturers began developing drivers and template software based upon Linux code to help customers integrate embedded Linux software as an alternative to commercial systems.

Niche Market Players

Several small embedded software developers were competing for business in niche markets. As end devices became more complex, their embedded software had to change as well. Often these changes create large requirements gaps between markets. The five primary markets in the embedded space were aerospace and defense, automotive, digital consumer products, industrial controls, and networking and telecommunications. What an antilock braking system, for example, would require from an embedded system had grown very different from the embedded system requirements in a laser printer. Therefore, companies in each space had gained a foothold and market share in vertical embedded markets where they provided software tailored to their clients’ unique industry needs. By 2002 the primary niche market developers were the following:

Vertical Market Embedded Developer Aerospace and Defense Automotive QNX Software Systems, Ltd. Digital Consumer Products Mentor Graphics (ATI Division), Express Logic, eParts, Industrial Controls QNX Software Systems, Ltd., RadiSys Corp. Networking and Telecommunications Enea OSE Systems, LynuxWorks Inc.

Many of these niche market companies had an advantage over larger companies in that historically they had more resources to focus on one set of industry-specific issues. Their embedded software packages often required little integration on the customer’s part.

8 Interview with Jerry Fiddler, Wind River chairman, August 8, 2002. Subsequent quotes are from this interview unless otherwise noted. 9 “2002 Embedded Brand Study,” EE Times and Embedded Systems Programming, 2002, p.2.

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Microsoft

By 2002 Microsoft had been trying to enter the embedded market for over a decade since the first launch of their embedded DOS product. In 2002 Microsoft had two embedded products: Windows XP embedded (XPE) and Windows CE. XPE was similar to Windows for PCs, but had been pared down to meet the needs of “almost PC” devices such as cash registers and kiosks. XPE was designed to run solely on ’s chip. Windows CE was an embedded OS that could run on many silicon chips. Windows CE included a rich user-interface found in the PocketPC platform and was most common in “smart” consumer devices. Microsoft embedded software had one key differentiator: footprint. Windows CE required a minimum of 200KB of memory and Windows XPE required a minimum footprint of 4MB, significantly more than those of the competition. Wind River’s VxWorks, for example, only required 40KB of memory.

While Microsoft had not made significant inroads in the embedded space, due to their size they were always considered a competitive threat. One Wind River employee remarked of Microsoft, “The threat is if they do want an account, they can pretty much give the software away for free.” Microsoft’s embedded systems products press releases alone could make waves in the embedded space. When they announced their embedded software product Microsoft At Work in 1993, for example, Wind River’s stock dropped dramatically in response.10

Microprocessor Fragmentation

The embedded industry supported a wide array of microprocessors. Companies such as Intel, , Siemens, Hitachi, and a variety of niche players each designed chips with unique architectures. Within basic chip architecture families, such as MIPS, SuperH, PowerPC, and X86, there could be many unique architecture designs. Architecture designs changed roughly every 18 months. Each of these architectures and designs required a separate embedded software code. In total, there were over 165 different chips and 20 architecture families running embedded devices.11 This microprocessor fragmentation represented a tremendous resource drain for embedded software developers to keep their software current with the latest architecture designs.

WIND RIVER SYSTEMS

Jerry Fiddler

Jerry Fiddler’s interest in technology began in college. He double-majored in music and photography at the University of Illinois after changing majors no less than four times. After graduating he wanted to become a research assistant at the University, but could only do so by first enrolling in a graduate program. He chose Computer Science due to his interest in computer-generated music.12

10 Interview with Jerry Fiddler, Wind River chairman, November 19, 2002. 11 Young and McCormack, op. cit., p. 30. 12 Incidentally, at the time of writing, Fiddler’s interest in music continued, as his band, XAZ, performed live and sold copies of its albums through MP3.com.

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With so much knowledge about designing computer systems under his belt, Fiddler decided to move from Illinois to . Shortly after arriving, he found a job at the University of California’s Lawrence Berkeley Laboratories building computer control systems and put his Master’s degree to work. After three years of designing systems for government contracts, he left to start up his own consulting business.

Fiddler incorporated Wind River Systems in January 1981 and ran it out of his garage. Fellow Lawrence Berkeley Lab alumnus David Wilner joined the company four months later. They worked with a variety of clients as diverse as the National Football League and film director Francis Ford Copolla. Fiddler and Wilner knew that the ability to abstract problems to components that they could reuse again for different projects was key to their success in consulting.

“Aggressively Horizontal”

Despite their consulting company’s success, Fiddler and Wilner grew tired of selling their hours to clients. They wanted to develop a product, and knew that the set of components they had developed to meet consulting clients’ needs could be packaged into a powerful product. Thus, they let their consulting contracts expire and began selling software products in 1986. They recognized an opportunity to increase the power and reliability of silicon microprocessors if the software embedded in the chip was more carefully designed and encoded. “One of the things that was very unique about it was we were software professionals and at that time most people doing embedded software were really hardware professionals,” Fiddler recalls. “The perception was most of the work is putting the hardware together, and then when you’re done you have to slide in a few lines of code. So you don’t really hire software people to do that, you get hardware guys.” In reality, software now plays an important role in the reliability and effectiveness of a microchip. This oversight left embedded software poised to change the semiconductor industry, with Wind River offering a substantially differentiated product. A year later Fiddler and Wilner launched the first edition of VxWorks.

Fiddler and Wilner, both more interested in technology than business administration, flipped a coin to decide who would become the CEO. Fiddler won, and Wilner became the CTO. This organization worked well through steady growth as business was booming, according to Fiddler, at “125 percent a year, compounded growth rate for like six straight years.” Eventually, Fiddler recognized his own weaknesses as CEO and Wind River decided to hire a chief operating officer to serve as a hands-on manager. Wind River hired David St. Charles for the role in 1990.

As Wind River’s client base grew to include companies from most major industries, their products remained virtually the same. VxWorks was the category leader for embedded operating systems no matter what kind of chip or product it was driving, and Tornado was by far the most comprehensive tools suite. When they launched new versions of the product, they were more reliable and faster, and often included features and functionality applicable to the widest . As a result, Jerry Fiddler claimed that Wind River had an “aggressively horizontal” strategy because they were everything to everyone.

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Wind River went public on April 15, 1993. Amidst internal turmoil and slowed growth, David St. Charles left shortly after the initial public offering. Fiddler was still CEO, but knew that Wind River needed someone else to help run the company. “We hit a wall shortly after going public, which was primarily for execution reasons,” Fiddler remarked. “We hadn’t built out the infrastructure. None of us has ever worked at a company, much less at a company growing at the rate that we were growing. I’d worked for the government, so had my partner.”

They decided to hire Ronald Abelmann to take over the CEO role in 1994. Fiddler switched roles to become the Chairman. With Abelmann at the helm steering the organization and Fiddler tackling strategic issues, growth accelerated once again, to 40-45 percent annually. This situation lasted for five years until April 1999 when Abelmann retired.

WIND RIVER ORGANIZATION

The coin flip between Jerry Fiddler and David Wilner in many ways set the tone for Wind River’s organization through the early 1990s. Both Fiddler and Wilner were technologists and knew very little about business administration. The company, therefore, was organized around its engineers. They had a suite of products that reached a wide audience across several industries, but they focused on none and offered minimal integration and customization services for their clients.

Until 1999, Wind River was organized by product. Engineers, comprising the majority of Wind River employees, worked exclusively with their product teams. Engineers were compensated on their product’s performance across key metrics, such as speed and reliability.

The sales force was divided into geographic regions. As regions became more densely populated with customers, they divided up the territory into smaller regions. Clients were serviced regionally as well. If a client had offices in California and New York, two distinct sales people would handle each account within the company. The sales team sold to engineering managers, usually those who were responsible for one product.

Salespeople were accompanied by field application engineers (FAEs), to aid in the technical presentation of Wind River products. The FAEs could describe in detail the functional specifications of each Wind River product and how the product would integrate with the client’s proposed chip architecture and application software. The FAEs were often product engineers who changed roles to gain more client interaction.

By 1999, a high percentage of Wind River’s revenue was centered in telecommunications and network devices. Target markets, therefore, emerged as focal points for Wind River’s sales organization. Additionally, as products became more complicated, clients wanted an “out-of-the- box” solution from Wind River that would require less integration. Talk of building a professional services team surfaced. President Abelmann did not want Wind River to grow a professional services team, however, as the margins were slimmer. As one Wind River engineering manager put it, “Ron Abelmann’s concern about services was that it is a 50 percent margin business, while our products are a 90 percent margin business. The marginal cost of software is negligible while the marginal cost of services is substantial.”

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By April of 1999, after Abelmann resigned, Wind River established a Networks business unit and a Services business unit (Exhibit 1). The Networks business unit was designed to create an expertise within a market to drive sales and growth. The group did not act autonomously, however, and drew engineering resources from the Platform Engineering division. Until 1999 the Platform Engineering division managed all engineering resources and Corporate Marketing managed all non-Networks marketing for all products.

Wind River Services evolved at the same time as the Networks group. The functional role of Services was to provide expertise to customers who did not have the resources in-house to implement and integrate Wind River products. The Services business unit drew resources from the FAE and field support engineer (FSE) staff. FSEs handled low-level integration and consulting for customers after they purchased Wind River products. There were eight FSEs worldwide in 1999, mostly scattered across North America. At this time, Services could only handle small consulting engagements, so they often hired a subcontractor to execute and implement.

Later, in April 1999, Wind River acquired Xact, a Texas-based networks software company. About half of the engineers from Xact were moved into the Wind River Networks business unit and the other half were moved to Services. The Xact team provided Services and Networks with their first exclusive employees.

VERTICAL SHIFT

By September 1999, Wind River had organized its product resources around four additional target vertical markets: aerospace and defense, automotive, industrial controls, and digital imaging. These groups operated within the Platform Business Unit responsible for developing Wind River’s core offering, VxWorks and Tornado, but provided feedback loops and minimal specialization toward meeting the needs of customers in those target markets. Wind River Services and Wind River Networks, however, had now become separate business units with autonomous teams designing specialized client systems.

In September 1999 Wind River hired Tom St. Dennis as their CEO and president. St. Dennis was the group vice president of the Planarization and Dielectric Deposition Product Business Group at Applied Materials, a semiconductor fabrication supplier. On his first day as CEO, Jerry Fiddler drove him to Integrated Systems, Inc. (ISI), then Wind River’s top competitor and rival. Six weeks later the two companies announced the merger. The merger was completed on February 15, 2000.

2000 Merger with Integrated Systems, Inc.

Integrated Systems, Inc. was a company very similar to Wind River in product offering, but not organization. In 1999 sales between the two companies counted for a majority of the total commercial embedded software sales.13 Wind River’s VxWorks competed head-to-head with ISI’s pSOS, as did Wind River’s Tornado with ISI’s pRISM+. ISI had grown to roughly the

13 Young and McCormack, op. cit., p. 28.

Wind River Systems OD-3A p. 10 same size as Wind River in revenue and employee count through acquisitions. In 1999 ISI had completed eight acquisitions since 1995.14 They had already developed vertical market products and a professional services team through these acquisitions. Many of ISI’s acquired companies remained independent within the corporate structure, with the pre-acquisition management remaining in control (Exhibit 2).

Wind River employees and investors close to the merger team described the ISI merger as a confusing time where revenue growth drove the company. A board member recalled the moments before the merger:

By the time 1999 rolled around we were in the middle of the NASDAQ bubble and growing the top line [revenue] was crucial. So we elected to acquire ISI. Some product lines were direct competitors, but many were complementary and filled holes.

Additionally, recalled the board member, Microsoft was planning a push into embedded software. This posed a tremendous threat to Wind River and was another reason to combine with ISI. Wind River feared becoming a small, niche player in the embedded space if Windows CE became the system of choice. The board member remembered:

Microsoft just launched Windows CE. And even though we emerged as the ‘largest’ company in the old embedded systems marketplace, a consumer operating system like Windows CE that could run all consumer devices would relegate Wind River to a niche player.

The combined product line of both Wind River and ISI was substantial. In addition to the operating systems and IDE tools, Wind River and ISI competed with similar products in many categories (Exhibit 3).

Calling the combination of Wind River and ISI a merger caused confusion amongst many Wind River employees, as they saw the transaction clearly as an acquisition on Wind River’s part. “It was an acquisition,” proclaimed one engineering manager. “We called it a merger because the companies were of almost equal size, when you take into consideration all of the companies inside of ISI. We were encouraged to use the merger terminology so there was less of an ‘us and them’ feeling.”

ISI Merger Aftermath

While Wind River’s management team at the time of the ISI merger was experienced at running a business, they were not experienced at merging companies. Following the merger, the combined company’s culture suffered. As one Wind River sales manager put it, “There was a natural inclination to feel like ‘we won’ because our sales organization had been battling [ISI] for so long.” Merging the eight companies under the ISI corporate umbrella with Wind River

14 Companies acquired by ISI included (in chronological order): Software Components Group, TakeFive Software, Case Tools, Inc., Dr. Design, Epilogue Technology, Diab Data, Inc., BetterState, and Software Development Systems.

Wind River Systems OD-3A p. 11 proved difficult. A member of the post-merger integration team for Wind River remembered trying to uncover the culture at ISI:

I remember going to Sunnyvale and trying to pull together representatives from each of the parts of ISI to give us an understanding of their culture so we could try to craft a new road map for a culture. The first time I asked, ‘What's the culture of ISI?’ a sales guy raised his hand and said, ‘We don't have a culture. ISI has a culture, Dr. Design has a culture, and SDS has a culture and Diab Data has a culture.’ You've got these bunches of little cultures and I think Wind River's culture was changing at the same time, too.

An engineering manager recalled that employees from the acquired companies never accepted the proposed integration:

I certainly know that people make remarks about places like Dr. Design. Well, the recent sales conference, they actually wore their Dr. Design T-shirts and didn’t wear anything Wind River. So that was an in-your-face [sic], ‘we’re not you – we’re still us’ kind of thing.

Another problem was Wind River’s new crowded product offering. Wind River had planned to phase out some of the competing products so that only one in each category survived but had been tentative in doing so for fear that they would lose customers in the process. A member of the post-acquisition integration team recalled Wind River’s hesitant efforts to scale back their product catalogue:

When we were making decisions on this thing, [we were told] ‘Don't do anything that would result in losing a customer or losing an employee.’ And I think people took it seriously, so that guaranteed that nobody was going to make any hard decisions. Because every time people said, ‘Gee, we've got two kernels, we've got umpteen compilers, umpteen debuggers, we've got at least two of everything, what are we going to drop?’ You could always find some example of where somebody was going to get marginalized: ‘Oh no, I've got a customer in Reykjavik Iceland that's using that version of the compiler from 1984, so therefore we can't drop it or we'll lose the customer.’

Vertical Markets

The idea to reorganize became a pressing issue to Wind River management as customers had progressively more complex embedded software requirements. One Wind River customer commented that Wind River was “a mile wide and an inch deep,” and noted that a niche competitor with knowledge and experience in one market could easily steal business from Wind River. According to one Wind River marketing manager, that customer was correct: “On an individual competition basis we were getting crushed.” Another employee noted:

What Wind River faced going forward was not necessarily the threat of one competitor beating them at their own game, but rather a set of competitors who

Wind River Systems OD-3A p. 12

had changed the game and who were going to compete with Wind River on very different terms. Wind River would run into a different competitor in each engagement. That one competitor could have a very compelling solution and be in fact a very tough competitor.

In November 1999, following the announcement of the ISI merger but before it closed, the Wind River senior management team met and weighed their options for how to restructure the company. Two camps emerged. One wanted the company to remain a horizontal products company, meeting unique client needs by simply bundling several of their many products together. This way, they claimed, the company could continue to profit from existing software packages without requiring substantial change in organization or headcount. The other, winning, camp argued for marketing and engineering reorganization around vertical markets. Since, they reasoned, the nascent Networks vertical market team had been successful, Wind River could repeat the strategy in successive markets.

Thus Wind River’s vertical business units were officially deployed in five distinct markets: automotive, industrial controls, aerospace and defense, digital consumer products, and networks. Professional services remained a separate business unit. Upon completion of the merger, ISI provided expertise in several of these vertical areas, especially automotive and professional services (Exhibit 4).

Within each Wind River vertical business unit was a core team of engineering, business development, and marketing professionals (Exhibit 5). Not all business units were staffed with an equal number of employees, nor did all vertical market business units remain autonomous. By July 2002, three distinct umbrella business units were formed, each including subset units. The Networks management team and financial budget governed the Networks Infrastructure and Digital Consumer (listed as “Products”) business units (Exhibit 6). Similarly, all core operating systems and tools, now bundled, were combined in the ETBU (Embedded Technologies Business Unit) with the Aerospace and Defense business unit. Additionally, the Automotive and Industrial Controls business units were grouped together.

Vertical Organization Aftermath

Product Changes

The combined basic product offering under the vertical organization changed slightly from the horizontal structure. After having combined ISI’s products, Wind River could now provide embedded software at every price-level and functional-level that their clients could need. At the lowest level of technical functionality resided VSPWorks, launched in March 2002 after the acquiring the core technology from the Belgian company Eonics. The next step up was OSEKWorks, which was primarily used in the automotive and industrial controls markets. For basic all-purpose embedded operating systems, clients could choose from VxWorks and pSOS, though Wind River strongly encouraged all customers who had not already done so to migrate to VxWorks. In 2001 Wind River launched VxWorks Advanced Edition (AE) for clients requiring enhanced reliability. At the highest level of functionality is BSD/OS, based on Berkeley Software Distribution’s open source operating system from acquired company BSDI. (See Linux

Wind River Systems OD-3A p. 13 and Open Source discussion below.) The basic Wind River tools offering remained Tornado and pRISM+ (from ISI).

The vertical market focus at Wind River brought more bundled products, particularly for Tornado. The first market-specific product at Wind River was Tornado for Managed Switches, aimed at the Networks vertical. Tornado for Managed Switches (TMS) was also the most successful of Wind River’s bundled products, representing more than 75 percent of their solution-level design wins in fiscal year 2002.15 TMS includes the VxWorks OS, Tornado development tools, and relevant telecommunications add-ons, such as a TCP/IP stack. Tornado for Home Gateways (digital consumer products), Tornado for OSEKWorks (automotive and industrial controls), Tornado for Industrial Automation (industrial controls), Tornado for Car Infotainment (automotive and digital consumer products), Tornado for Intelligent I/O (networks), and Tornado for D0-178B (aerospace and defense) followed.

Return on Investment and Resource Allocation

While the vertical market groups were developing improved bundled products and expertise in their niche, they were also taking resources away from Wind River’s core revenue drivers: VxWorks and Tornado. Some at Wind River argued that the additional funds thrown into the vertical market groups were spent inappropriately. One engineering manager commented:

We did get some additional revenue from the Networks business unit as they doubled their revenue each year in its first few years, but there’s hardly any revenue to show for the other business units, even for the technologies we built out for the markets. They’re contributing a little bit, but 90 percent of our business is still in the OS and tools.

Another engineering manager felt the resource drain in his department. While he understood that the vertical business units needed time and resources to get started, he did not feel that the execution had been beneficial to both parties:

If I ask how much were these other business units spending on their resources and how much were they making for their product, I don’t think they are making it. They’re in start-up mode, so to speak. It’s obvious you can’t start something up for free. The revenue that was likely coming in just for VxWorks and Tornado, some of it’s clearly been spent not putting resources back into improving VxWorks and Tornado, but rather investing in starting up the vertical. Everybody keeps asking, ‘What is it that we’ve de-committed now that we have fewer resources and now that we’re funding other divisions or other business units or other verticals?’ And the usual answer is to point to some tiny little stuff that wasn’t making any money anyway… It’s a continual game of trying to get more blood out of this stone.

Some at Wind River complained that the unique findings of the vertical business units were not surprising – or worth the special effort. An engineering manager related:

15 Young and McCormack, op. cit., p. 14.

Wind River Systems OD-3A p. 14

The requirements that they have given us were pretty much things that we knew already anyway or could have found out already anyway just through discussions with the normal range of customers. It didn’t require a vertical business unit to somehow give us this special insight.

Feedback Loops

As Wind River’s vertical business units developed expertise, they needed the base level of the operating systems to support their customer’s unique needs. Communication channels feeding information back to the operating system engineers were key in this plan. This feedback often came from marketing employees in the verticals and field salespeople. A sales manager commented that the product teams were unresponsive to his customer needs feedback:

The sales organization and the business units kind of decide that they want to attack the marketplace, and we don’t always follow through at the engineering levels and create product that makes sense for that marketplace; or a business model that makes sense for that marketplace.

Job Description Changes

Job descriptions eventually changed, as well, to align with the vertical strategy. By 2001 engineers, long compensated and rewarded by the technical specifications of their work, were now being graded on customer satisfaction (Exhibits 7 and 8). One senior manager who was influential in changing the engineers’ job description explained the shift:

The overriding goal is that no matter what you do it will have some component of trying to satisfy a customer in it. And that’s meant that engineers have to take ownership for things outside of their particular technology space. We have to have some line of sight over what customers actually need so that we can understand the challenges that customers actually face.

A large component of this customer satisfaction initiative was to provide products that could easily integrate with clients’ system architecture. The same influential senior manager commented:

We coined the term “Integration is Job #1” and for engineers what that means is that they can no longer think of their technology in a silo. In fact it is almost worthless if that’s what it is. The value is whether it works as an integrated network and it should work with all of the other technologies next to it.

While, from a business standpoint this made perfect sense, the manager confessed: “We handed the engineers an incredible challenge. It’s almost mathematically impossible for an engineer to be asked to verify that it works with all of the different possibilities.”

Wind River Systems OD-3A p. 15

Changing Customer Opinion

While Wind River’s organization has changed substantially from 1999 to 2002, many customers did not notice the changes. Some customers only knew VxWorks or a few Wind River products, and were unaware of the vertical markets Wind River served or the custom products they could create. A sales manager noted, “That’s what we struggle with right now, being seen differently in the market—many of them call us VxWorks. You know, they think that’s the name of the company.”

One engineering manager thought customer opinion would evolve over time, but that the change had not happened yet:

I think by far [customers] see us as the company that produces VxWorks. I think we’re doing a lot to change that image. I think we need to. I agree with the programs that we’re trying to put in place to change that. I do think that in some areas the customer is also right because it takes a lot of effort and a number of years to get familiar. You can’t just say we’re going to create some vertical business units and 18 months later, you’re an experienced hand in that particular area.

OCTOBER 2002 ISSUES FACING WIND RIVER

After the vertical market organization, external issues created additional threats and resource drains on Wind River.

Linux and Open Source

Linux and open source software gained popularity amongst embedded developers beginning in 2000. Wind River customers began using Linux to develop in-house embedded software. Some clients chose Linux because of the advantages of downloading pre-configured source code, free source code, or because their development team had an open source advocate. One manager remarked, “How do you compete against Linux when it is perceived to be free? Especially when these companies are cutting costs.”

Embedded Linux developers such as Monta Vista, LynuxWorks, and the embedded business unit of Red Hat offered additional Linux competition for Wind River.

A sales manager, frustrated at losing business to Linux, proclaimed, “I really believe in looking over your shoulder a lot, constantly. Knowing who’s behind you, who is in the rear view mirror. And it’s clearly Linux.” He continued to explain that the Linux would remain an option despite developers’ difficulties in making money from it “because proprietary never wins.” The Linux community, he continued, was dedicated to the open source movement:

These are people who go home, and at night they write public domain software. They do that for fun. People want to support their brethren. They don’t want to put the dollars in Microsoft’s pocket. They want this big beast that has become

Wind River Systems OD-3A p. 16

known as the competitor to Microsoft to succeed. They want Linux to do that and when given the chance, they’re going to use it.

Wind River ultimately answered the threat of Linux with the 2001 purchase of BSDI, a small Minneapolis-based software firm with a UNIX operating system based on the 1970s open source code BSD (Berkeley Software Distribution). Unlike Linux, BSD does not have a strict GPL, and BSD-based code could therefore more easily be sold after augmentation. BSDI had an operating system that could serve as a basic platform, much like VxWorks.

BSDI did not have the number of engineers and salespeople, however, to act as an operating system across all of Wind River’s vertical business units. Instead, they chose to focus on Networks. An employee close to BSDI commented on their focus:

We're in networks and we're part of the server product group within networks. Though we're really a platform like VxWorks. We're clearly positioning our product in that space, knowing that as a platform it has much more breadth if need be, but given the practicality of the size of our group, we realize that the only way we're going to succeed is through focusing because if we went horizontal, it would kill us. We would not have the ability to build a product that would satisfy the needs of anybody, externally or internally.

While the Linux-open source alternative still existed, many of Wind River’s senior executives did not believe it would last. Wind River CFO Mike Zellner explained why he viewed Linux as a fleeting phenomenon:

I'm a finance guy, not an engineer, so allow me to slip up on the technical definition here, but if any change that's made to a software component that touches the Linux kernel, which is typically the profile in an embedded solution because you want to make it as small and as tight as possible, because it's specific purpose built solutions as opposed to general solution… many of the components end up touching the kernel. Legally, that software has to be turned open to the community, so that they can potentially weave it into the next generation of Linux. That's the whole concept, that's why it keeps moving, why it keeps getting better, so to speak. Well, companies spend a lot of money weaving these things together. They don't want to spend millions and millions of dollars coming up with solutions, and simply take that solution they think is unique, and open it up to the community. They lose their competitive advantage.16

Of the commercial Linux developers, such as Red Hat and Monta Vista, Fiddler commented:

I don’t expect any company to succeed with embedded Linux. I don’t know how anybody possibly can. Nobody’s ever figured out how to make a software company that succeeds without being able to charge for the intellectual property that they create. The GPL specifically does not allow you to.

16 Interview with Mike Zellner, Wind River chief financial officer, October 3, 2002. Subsequent quotes are from this interview unless otherwise noted.

Wind River Systems OD-3A p. 17

Microchip Market Fragmentation

Since inception, Wind River had consistently tried to make their software compatible with a wide range of microchips. In 2002, Wind River developed systems to run on 20 different microchip architecture families. They created joint partnership programs, called Centers of Excellence, with a few of the large microchip designers, such as Intel and Motorola, to share the R&D costs of software (Exhibit 9). Nonetheless, the fragmented embedded microprocessor market represented a strategic issue and a financial drain for Wind River. For one, it removed engineers from focusing on the quality of the products in favor of breadth of support. This resource drain was difficult to deal with, as one engineering manager noted, “Forty of my engineers are externally funded [through the Centers for Excellence] in order to facilitate [platform support]. So really in fact there’s only 40 more working on VxWorks developments; there’s not 80 total.”

However, the variety of chip architectures forced Wind River to create code they could leverage across platforms. The engineering manager saw the brighter side to the scope of microchip platforms:

To make it less and less of a drain, we abstract the chip and hardware layers. It encourages you to try to think as much as possible about the part that is generic and non-chip specific, and how to make that really generic. I mean, if you’re on a small set of chips, you might think, ‘Well, okay, I got it licked; I got something that’s generic to all of them.’

CONCLUSION

Wind River made substantial organizational changes to prepare for the future of the embedded software industry. In many ways, they led the industry changes themselves. However, Wind River had yet to reap the benefits of the organizational and strategy changes. They were faced with evolving competition across five unique vertical markets that would continue to pose threats. Tom St. Dennis and Jerry Fiddler, while they had come a long way, were not done making changes at Wind River.

Wind River Systems OD-3A p. 18

Exhibit 1 Wind River Organizational Chart, September 1999

BoardBoard ofof DirectorsDirectors

JerryJerry FiddlerFiddler TomTom St.St. DennisDennis Co-FounderCo-Founder && PresidentPresident && CEOCEO ChairmanChairman (as(as ofof 9/20/99)9/20/99)

DeDe AnnaAnna MckwunyeMckwunye Sr.Sr. ExecutiveExecutive Administrator/Administrator/ IRIR AdministratorAdministrator

CurtCurt SchackerSchacker GrahamGraham ShentonShenton WindRiver JohnJohn FogelinFogelin PeterPeter RichardsRichards DickDick KraberKraber WindRiver VPVP ofof MarketingMarketing ManagingManaging DirectorDirector Business Units VPVP ofof PlatformPlatform VPVP ofof WorldwideWorldwide VPVP ofof FinanceFinance && Business Units && CorporateCorporate OfOf EuropeanEuropean EngineeringEngineering SalesSales CFOCFO DevelopmentDevelopment OperationsOperations DaveDave FraserFraser VPVP && GeneralGeneral ManagerManager ofof CorporateCorporate Comm.Comm. Core Engineering Finance Core Engineering NorthNorth AmericaAmerica SalesSales Finance WindRiverWindRiver NetworksNetworks

FacilitiesFacilities InternetInternet CoreCore ProductProduct Mktg.Mktg. Center of Excellence Infrastructure Center of Excellence JapanJapan MarketingMarketing Infrastructure HumanHuman ResourcesResources InternetInternet Legal InfrastructureInfrastructure MarketMarket Develop.Develop. General Systems Legal General Systems AsiaAsia PacificPacific ServicesServices InternetInternet InformationInformation Tech.Tech. InfrastructureInfrastructure M&A/Bus. Develop. M&A/Bus. Develop. Mil Aero EuropeanEuropean SalesSales Internet Mil Aero Finance/Ops.Finance/Ops. InvestorInvestor RelationsRelations Internet InfrastructureInfrastructure M&AM&A InvestorInvestor RelationsRelations Kamran Sokhanvari AutomotiveAutomotive SalesSales ServicesServices Kamran Sokhanvari VP & General VP Operations VP & General VP Operations ManagerManager ofof Hardware Hardware WindRiverWindRiver ServicesServices PlatformsPlatforms IMCIMC SalesSales OperationsOperations EngineeringEngineering Ops.Ops. ProfessionalProfessional E_CommerceE_Commerce Services Marketing Ops. Services Marketing Ops. Dig. Imaging Dig. Imaging FCEsFCEs MaterialMaterial Mgmt.Mgmt. Training Worldwide Training StrategicStrategic ProgramsPrograms Worldwide ------Finance/Ops. Finance/Ops. Cust.ServicesCust.Services

WorldwideWorldwide MarketingMarketing MarketingMarketing ––-––-

Source: Wind River Systems

Wind River Systems OD-3A p. 19

Exhibit 2 Integrated Systems, Inc. Organization September 1999

Corporate Operations

Bill Smith – Jim Challenger – CTO CFO – Michel Genard – Partners – Michael Whelan – HR – IS&T – Steve Houstchens – Strategic –Operations – Linda Nixon – Marcom Chuck Boesenberg CEO & President – Tanya Krall – Executive Assistant

JoeJoe Addiego Addiego JCJC Sarner Sarner ScotScot MorrisonMorrison MartinMartin Caniff Caniff DavidDavid Stepner Stepner AndiAndi PabingerPabinger ViceVice PresidentPresident VPVP && GMGM VPVP && GMGM PresidentPresident PersidentPresidentPersident GeneralGeneral ManagerManager WWWW SalesSales & & ServicesServices EmbeddedEmbedded PlatformsPlatforms DesignDesign AutomationAutomation DoctorDoctor DesignDesign DiaDia --SDS SDS TakeFivTakeFiv

Source: Wind River Systems

Wind River Systems OD-3A p. 20

Exhibit 3 Wind River and ISI Products Comparison Table

Host Development Tools (on both and UNIX) Product Description Wind River Product ISI Product Development Tools Tornado pRISM Source Code Editor Included in Tornado Included in pRISM Compiler GNU (Open Source) Diab (High Performance) Software Debugging SingleStep pROBE+ Object Browser Tornado Browser pMONT+ Host Shell WindSh - Source Code Manager - SNiFF+ Simulation Environment VxSim pSOSim Execution Profiling Tool WindView Esp

Runtime Libraries (code that runs within the customer’s final product) Product Description Wind River Product ISI Product Real Time Operating System (RTOS) VxWorks pSOSystem2 Memory Protected Operating System VxWorks AE pSOSystem3 Networking Stack WindNet pNA Multiprocessing Library VxFusion and VxMP pSOS+m Remote Procedure Call Library VxDCOM (based on Microsoft) pRPC+ (based on SUN) Universal Serial Bus USB Developer’s Kit - High Speed Proprietary File System - pHILE+ Microsoft DOS File System dosFs Included in pHILE+ CD-ROM File System cdromFs Included in pHILE+ Flash File System TrueFFS - ANSI C Standard Library Included in VxWorks pREPC+ POSIX Library Included in VxWorks - Shared Library Manager - pLM+ Target Shell Included in VxWorks Included in pSOSystem

Microprocessor Architecture Family Support Architecture Family Name Wind River Support ISI Support ARM Consortium Yes Yes Hitachi SuperH Yes Yes Yes Yes Intel StrongARM and XScale Yes Yes Intel x86, , Pentium II, III; AMD K6 Yes Yes MIPS Consortium Yes Yes Mitsubishi M32/R Yes Yes Motorola 68K Yes Yes Motorola ColdFire Yes Yes Motorola M·CORE Yes Yes Motorola/IBM PowerPC Yes Yes

Source: Wind River Systems

Wind River Systems OD-3A p. 21

Exhibit 4 Wind River Organization Chart December 1999

BoardBoard ofof DirectorsDirectors JerryJerry Fiddler,Fiddler, ChairmanChairman NarenNaren Gupta,Gupta, ViceVice ChairmanChairman

CEOCEO TomTom St.St. DennisDennis

MergerMerger TransitionTransition Mgmt.Mgmt. TeamTeam Digital Consumer Digital Consumer ChuckChuck BoesenbergBoesenberg Produce Produce DickDick KraberKraber

PlatformPlatform EngineeringEngineering NetworkNetwork ProductsProducts AutomotiveAutomotive ProductsProducts Finance/OperationFinance/Operation JohnJohn ForgelinForgelin DaveDave FraserFraser ScottScott MorrisonMorrison DickDick KraberKraber

Aerospace/DefenseAerospace/Defense ProfessionalProfessional Service/Service/ NorthNorth AmericaAmerica SalesSales IP/LegalIP/Legal && IMCIMC ProductsProducts DoctorDoctor DesignDesign PeterPeter RichardsRichards MarlaMarla StarkStark JCJC SarnerSarner KamranKamran SokhanvariSokhanvari

InternationalInternational SalesSales MarketingMarketing ToolsTools ProductsProducts JoeJoe AddiegoAddiego CurtCurt SchackerSchacker DavidDavid SteperSteper

Source: Wind River Systems

Wind River Systems OD-3A p. 22

Exhibit 5 Organization Chart of Networks Business Unit, October 2002

Dave Fraser Vice President and General Manager (acting) WR Networks

Marvis Hackett-Walker Senior Executive Assistant

Sal LiRosi Brian Lazara Larry MacFarlane Nikolas Wekwerth Senior Director Director Senior Director Director Engineering Server Products Digital Consumer Group Business Develoment WR Networks Infrastructure WR Networks Infrastructure WR Networks WR Networks

Alex Helmke Graeme Harfman Rick Pitz Margaret Wasserman Senior Product Manager Senior Product Manager Senior Product Manager Principal Technologist Marketing Marketing Marketing WR Networks WR Networks Infrastructure WR Networks Infrastructure WR Networks Infrastructure

Source: Wind River Systems

Exhibit 6 Wind River Organizational Chart, July 2002 Chairman, President & CEO Board of Directors Tom St. Dennis Jerry Fiddler

Wind River Global OPS Sales & Products CFO Marketing Kamran Mike Zellner Dave Fraser Sokhanvari Steve Kennedy

ETBU/AD Services HR Americas Tony Tryba Brad Murdoch John Brennan Ken Edoff

Auto & Strategic Industrial Legal Accounts Scot Morrison Marla Stark Mark Baker

Networks EMEA Dave Fraser Andreas (Acting) Pabinger APAC Namiq Kunimoto

Japan Michikazu Fujiyoshi Source: Wind River Systems

Wind River Systems OD-3A p. 23

Exhibit 7 Senior Software Engineer Job Description, Before Vertical Integration

Organizational Unit: Embedded Technologies Business Unit (ETBU), VxWorks Product

In conjunction with other senior engineers, you’ll help design and build the architecture supporting the next generation of Wind River Real Time Operating Systems. You’ll assume a leadership position in the design, implementation, and delivery of significant components of the VxWorks RTOS, working both independently and in small teams.

Qualifications:

• Relevant bachelor’s degree (or higher) plus minimum 5 years work experience • Strong C programming and design skills • Embedded application or operating system engineering exposure • Good project organizational skills • Ability to deliver finished, professional quality work • Demonstrated technical leadership and co-operative teamwork skills

Additional Desirable Skills:

• Understanding of fault-tolerant, resilient systems design • Solid understanding of architectural strategies and current technologies for building modular, component-based systems (COM, CORBA) • Broad contemporary computing background (languages, systems, environments, trends)

Source: Recruiting Department, Wind River Systems

Wind River Systems OD-3A p. 24

Exhibit 8 Senior Software Engineer Job Description, Digital Consumer Group, After Vertical Integration

Organizational Unit: Digital Consumer

Smart devices that connect directly to the web are appearing everywhere and companies creating these devices need complete tools to make them at “internet” speeds. In a startup atmosphere with significant growth opportunities, you will be an integral part of a team creating a complete solution that will make the development of internet devices easy and straight forward. As part of the continuous evolution of these successful tools, you will also work directly with key customers to ensure that we continue to be the market leader in enabling the internet to think. Embedded computers are multiplying at enormous speeds and will be a critical part of the future digital ecosystem. Be part of the leadership for this next big wave!

By championing strong test approaches, Senior Software Test Development Engineers set direction for test engineering in cross-functional teams which are developing state-of-the-art internet appliance software and by participating in automated test design and development for all products.

Qualifications: • BSCS or equivalent with more than 3 years industry experience • Demonstrate ability to lead test efforts • Experience with UNIX, shell scripts and Windows • Experience with JAVA or another object oriented language • Familiar with commercial test tools and suites • Proven experience in delivering products meeting customer needs • Demonstrated teamwork and communication skills • Self-starter and results oriented

Additional Desirable Skills: • Experience in developing embedded computer devices • Broad contemporary background (languages, systems, environments, trends) • Experience with VxWorks based devices • Program management and/or leadership of small teams • Enjoys fast cycle time projects • Enjoys customer interactions and appreciation of end product needs • Advocate for ease-of-use

Source: Recruiting Department, Wind River Systems

Wind River Systems OD-3A p. 25

Exhibit 9 Wind River Centers of Excellence

Manufacturer Architecture Hitachi SuperH Intel Intel Architecture, StrongARM, Xscale MIPS Technology, Inc. MIPS Motorola PowerPC, Security processor

Source: Wind River Systems