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ATI buys struggling Chromatic

The graphics leader will use the acquisition to move into the market for integrated chips for set-top boxes and other devices.

Graphics heavyweight ATI Technologies today acquired Chromatic, a once promising media processor venture that recently had to lay off a big chunk of its workforce, for $67 million and will use the new company to move into the market for integrated chips for set-top boxes and other intelligent devices.

The acquisition and ATI's product plans seems to symbolize everything that is going on in the turbulent graphics chip market.

Acquisitions such as this have been expected for some time, according to analysts, because the 3D graphics market is saturated with many more vendors than demand can support. Peter Glaskowsky of MicroDesign Resources estimates that there are more than 40 companies that actively participate in the 3D market, and, rather than shrink, the number of participants has irrationally grown.

Consequently, the crowded field has forced the price of 3D PC chips through the floor and prompted companies to look for related, but new, sources of revenue.

Additional shocks are expected when Intel and others release processor companion chips (chipsets) which integrate 3D graphics, thereby eliminating the need for 3D chips in a large segment of the market. Vendors either have to move upstream into higher-end 3D segments or sideways into lateral markets.

Like ATI, which provides one of the most widely used graphics chip lines in higher-end PCs today, many companies have voiced interest in shifting to "system-on-a-chip" processors as a way out of the dilemma. The only problem: Barely anyone has made money on the concept so far.

"There haven't been substantial revenues here yet," said Dean McCarron, principal analyst at Mercury Research

With Chromatic's technology, ATI indicated that it will move to develop chips that integrate 3D functions with processors for the sub-$500 device market. Chromatic itself had been working on a system-on-a-chip solution on its own, according to ATI. The integrated processor was slated to succeed Chromatic's Mpact media processors. ATI's main product focus centers around the RagePro graphics chip, a 3D accelerator for high-end desktops and notebooks.

"This move is intended to extend our lead in the graphics and multimedia industry," said Ky Ho, ATI's president and CEO in a prepared statement. "Chromatic has a history of developing excellent technology. ATI has the infrastructure and economies of scale to enable success in this new product category."

"Chromatic's development to date adds significantly to our technology portfolio and allows us to extend our competencies into fast-growing markets," said Adrian Hartog, ATI's vice-president of engineering. "This higher level of integration allows us to address fast-growing segments in the sub-$500 computer, set-top box, and consumer electronics industries."

ATI will obtain all in-process research and development related to future products of Chromatic, as well as all Chromatic patents, according to the company. The purchase of Chromatic will be financed through cash. The transaction is expected to close on or about November 13, 1998.

Sunnyvale, California-based Chromatic was once one of the more intriguing companies in the graphics world, but hit on hard times over the past year. The company specializes in programmable "media" processors that can handle 3D graphics, DVD playback, and modem functions.

Further, unlike most 3D accelerators, its Mpact chips were programmable, like a computer microprocessor. In other words, functions could be added to it. Both Gateway and Compaq adopted Mpact processors for their PC/TV theater projects.

Unfortunately, making the chip programmable made the Mpact expensive to develop for and major wins with vendors were scarce. The company laid off 50 percent of its workers this summer.

ATI, by contrast, is one of the dominant players in 3D. The company has a 27 percent market share, according to Mercury, and has deals with most of the major vendors, including Hewlett-Packard and Dell.