Back in August 2010, Intel (NASDAQ:INTC) bought McAfee software for $7.6 billion. The company has been taking heavy duty "steam" from analysts and shareholders ever since. On the day of the purchase, the stock sold off by 3.5%, hardly a vote of confidence for Paul Otellini and the Intel board of directors who voted for the deal.
Being a hardware guy, utterly fascinated by the fact that Intel can repeatably make widgets whose dimensions are measured in billionths of a meter, I really didn't know or care what they intended to do with McAfee. I just assumed that a group of people who could do the magic of making extremely complex integrated circuits containing billions of transistors must have a good reason for buying a software company.
Now, this is back in the day when the Sandy Bridge was the new thing on the block, made on the new 32nm process. We hadn't heard about 22nm yet, and certainly not the 22nm Trigate process that was soon to come. Those in the know understood that the linking of Intel processors and McAfee's software more closely could finally thwart those warped people who write malware that infects your computer through the Internet. In the world I would design, those who purposely infect your computers with viruses and employ phishing technology to steal your identity would be committing a capital crime with commensurate sanctions should they get caught.
Intel, with the McAfee purchase, promised to end all this forever. The anti-virus software available is so bad and slows computers so badly that it is not much better than a virus itself. The Intel solution talked about doing the antivirus work in the processor itself. This would make the antivirus magic so fast as to be undetectable to the average computer user like me. Intel promised zero day protection, and got even more steam from the software people for presuming to do such a thing.
We are three years out from that huge acquisition. Sandy Bridge has come and gone. Ivy Bridge (Sandy Bridge on 22nm) has come and gone. Even Otellini is gone! We now have Haswell, the first processor with the hardware hooks that will allow the security promise to become reality. In the middle of May 2013, McAfee introduced LiveSafe, a cross platform universal security package:
This new security solution seemingly depends heavily on the very latest of Intel processors. McAfee LiveSafe service includes McAfee Anti-Theft, which utilizes Intel Anti-Theft Technology, and an 'innovative' application of Intel Identity Protection Technology (IPT), which is a tamper-resistant hardware authentication mechanism.
By combining Intel IPT with facial and voice recognition, McAfee LiveSafe service customers with a 4th generation Intel Core processor-based Ultrabook devices will be able to take advantage of this unique multi-factor authentication capability giving consumers a deeper level of trust and protection... Ultrabook device owners also will receive the added benefit of the McAfee Security Advisor service, providing immediate answers to all their security questions.
Beginning in July 2013, McAfee LiveSafe service will be available through select retailers for $19.99 for a 12-month subscription when purchased with a new PC or tablet, and $79.99 for a 12-month subscription for consumers' existing PCs and tablets. McAfee LiveSafe will come pre-installed on Ultrabook devices and PCs from Dell starting on June 9, 2013.
If this works -- and that's a very big if -- think about what it means to Intel. A sample subscription comes with the purchase of a new computer for $19.95. The full package will cost $79.99 per year. Dell (NASDAQ:DELL) will be installing LiveSafe on all their computers, which will all be Haswells (remember Haswells are the first processors to support the magic). The rest of the computer sellers will follow suit in order to get a piece of the party.
So, let me make a stupid assumption for the sake of simplicity: All Haswells will wind up in computers with LiveSafe installed on them. I will further assume that the average life of a PC will be five years, but that really doesn't matter much. Intel ships 300 million processors (Haswells) even in an awful market. The Haswells will have an average selling price of $100 (again, simplicity) for $30 billion of client revenue, give or take.
Now if that 100% of Haswell users like and buys LiveSafe, it would add $80 x 300 million, or $24 billion of new revenue. That's the first year. The second year would ADD another $24 billion of new revenue while the first year buyers re-subscribed. The third year adds another $24 billion, and the fourth year, another $24 billion. The fifth year gets another $24 billion, so after five years an equilibrium occurs at $120 billion of annual security software revenue (new subscriptions offsetting end of life PCs). The only businesses that generates larger gross margins than Intel are the software companies.
Now, it's just plain silly to think that every PC owner will sign up for LiveSafe, and we know that the PC sellers will get a piece of the pie, but what if only 20% of the PC owners sign up? That five-year equilibrium point is still $24 billion of recurring high margin revenue each year. Most of the solution will reside on the processor chip and be enabled by the LiveSafe package. How much can that cost?
Since I heard about the McAfee acquisition I wondered how Intel would monetize, on a recurring basis, the hardware solution -- which, of course, is paid for when the customer buys a new computer with a Haswell chip in it. Recurring silicon revenue; I love it. Only Intel could pull this off.
This makes the mobile business look like an annoying distraction. I'm dying to hear about the TV thingy.
Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.