S3-Intel deal heralds more consolidation

The long-predicted consolidation in the crowded graphics field took another big step forward yesterday when S3 said it will make "integrated " chipsets in 1999 that combine 3D capabilities with some of the input-output functions required by Intel's Pentium II processors.

There are more than 40 graphics chip companies now, "and I certainly would hope that graphics companies recognize that there are way too many of them," said Peter Glaskowsky, graphics analyst at MicroDesign Resources.

The pressure point is a technology license agreement announced yesterday between S3 and Intel. Integrated chipsets are expected to become more popular in 1999 because they cost less than traditional multichip solutions. To make integrated chipsets for Pentium II-based computers, chipmakers need access to patents for the "P6" system bus, which essentially serves as the data gateway for the Pentium II. Yesterday's agreement gives S3 access to the P6. Not everyone will be so fortunate.

"This creates additional barriers for other graphics players," said Rick Bergman, vice president of marketing at S3. "Intel isn't going to do this for everybody."

Chip integration and access to Intel intellectual property will become looming issues for chipset vendors and graphics vendors in 1999, say analysts, and in many ways the two markets are merging into a single market.

"If you are in the chipset business, you better darn well have a P6 product," said Nathan Brookwood, a consultant with Insight 64.

Integration has become an issue of the economics involved, he said. Integrated chips are simply cheaper. Intel itself, in fact, will be releasing its own integrated chipset, code-named Whitney, in the first half of the year, said sources, which puts pressure on other companies to develop integrated chipsets. (Intel is an investor in CNET: The Computer Network, publisher of News.com.)

Graphics vendors, meanwhile, are under pressure because of overcompetition. By some estimates, there are far more than the market can support. Integration serves as a way off of the development "treadmill," said Bergman.

S3 will not be the only company besides Intel in the integrated chipset market, said Dean McCarron, an analyst at Mercury Research. Most of the major companies are working on similar projects.

Graphics makers ATI Technologiesand Nvidia are likely working on integrated solutions, as are chipset makers Acer Laboratories and SiS.

Two other companies, Via Technologies and Trident, meanwhile, are already working on a co-development agreement that will result in a series of Pentium II integrated chipsets.

Via, which signed a licensing agreement with Intel earlier this month, will release an integrated chipset for the Pentium II desktop market in the first half of 1999 that combines Via chipset technology and a Trident graphics engine, said Dean Hays, director of marketing for Via. Trident, meanwhile, will come out with a similar chipset for the mobile market.

"There will be players who will drop out because they are in the bottom half and do not have chipset technology," said Dean McCarron. Integrated chipsets will likely become the mainstay for the sub-$1,000 PC market by the end of next year, he added.

Integrated chipsets will not be the end-all, be-all for graphics chips, said Glaskowsky. Margins will still be higher for performance chips. Still, the integrated chipsets will begin to occupy the inexpensive and mid-tier PC market. S3 is now well-positioned in this market.

Intel's i740 not such a heavyweight
Ironically, earlier this year, analysts predicted that actions by Intel would prompt consolidation in the graphics market. This is occurring, but not the way many predicted.

Intel's pressure was supposed to come from the i740, a graphics chip released in February. Relatively cheap and powerful, the i740 was expected to put pricing pressure on chips from other vendors. Few computer makers however, adopted the chip. At the same time, major graphics companies came out with new generations of products that surpassed the performance of the i740 and cost about the same.