| Let's call Embedded what it is -- a Service Industry |
by Curt Schacker (May 31, 2006)
Foreword -- The embedded market is a service industry, because off-the-shelf products are fundamentally ill-suited to the unique requirements of specialized embedded devices, argues Curt Schacker in this brief guest column. Schacker is CEO of embedded services company Embedded Solution Partners, and a veteran of Wind River and Ready Systems.
Let's call Embedded what it is -- a Service Industry
by Curt Schacker
If you look at it as a whole, the history of the embedded software industry -- that is, the suppliers of software and tools to developers of embedded equipment and devices -- is actually pretty dismal:- One successful initial public offering (Wind River Systems)
- Anemic revenue growth
- Marginal profitability, if not an outright cumulative loss over 20 years
I have to ask myself, how could so many smart people produce such an unappealing result? The answer must lie at some deeply rooted level, some early flawed assumption that sent everyone off in the wrong direction and which continues to mis-guide us to this very day.
Well, I'll nominate one idea: our most basic definition of the industry is dead wrong! Embedded suppliers by and large consider themselves product companies, but I would argue that the embedded industry is a service industry, and what we have here is one giant, square peg that we've all been trying to shove into a giant, round hole. Let me explain.
The basic formula for a product company is to build something once, and then sell it to as many people with as few customizations as possible. The less you have to change your product for a particular customer, the greater your profits. With software products, of course, there is ongoing maintenance and support, but here again the goal is to add only those enhancements which can be leveraged by the large majority of customers. In trying to execute as product companies, embedded software suppliers constantly walk the fine line between breadth (where they can sell their product to lots of companies) and depth (where the product is compelling enough to drive revenue at profitable margins).
Service companies do something very different. They engage with customers to determine what problem they are trying to solve and then propose to construct a relatively unique solution, which they then attempt to deliver in a profitable manner. Now, here's the key point: one of the great distinctions of embedded computers is their uniqueness of purpose. Where general purpose computers solve generalized problems, embedded computers solve very specific problems and are built exclusively to do so. And this means that developers of embedded products are much more inclined to see value in the form of services rather than in the form of products.
It's a classic disconnect. A bunch of companies are running around saying, "Hey, look at this great product I've built. You should pay me a lot of money for it." And the response goes something like, "Yes, that's nice but it's missing these 7 key features that we need, so unless you add those, we're just going to develop what we need ourselves." What if, instead, the conversation started, "We have these really smart people who have expertise in this technology discipline, and we'd be happy to engage in a business relationship where you can leverage them to solve your particular problem." I predict you'd have a very different discussion.
Ahhh, I can already hear the embedded software companies stammering, "But, but, but, service companies don't drive the kind of multiples I need to make me and my investors rich; we have to be a product company." To them, I say, go ahead and try and be whatever you want, but your wanting it isn't going to change the nature of the industry. You simply can't ignore the objective metrics that we use to measure the success of this industry, and sorry, but they aren't pretty.
This isn't about gloom and doom, it's about facing up to the reality of what the embedded software industry is -- and isn't. If vendors accepted the industry at face value, they would be much more likely to develop strategies that would result in profitable businesses and reasonable multiples, maybe not 10 times sales, but certainly better than where we are today.
 About the author -- Curt Schacker has spent his entire career in the embedded industry. He started out in 1985 developing flight software for NASA's Hubble Space Telescope before moving to embedded software pioneer Ready Systems. In 1990, he joined Wind River Systems, where he served in the roles of Field Applications Engineer, Northwest Regional Manager, and Vice President of Marketing. In 2002, Schacker co-founded Embedded Solution Partners, an embedded software and services firm based in San Mateo, Calif., where he currently serves as CEO. He holds a BS in Computer Science from Wright State University in Dayton, Ohio.
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