Sources inside and close to the company said that S3 purchased Exponential's portfolio of 45 patents, which provide a key for building a 64-bit microprocessor that can read both CISC and RISC instructions, in an anonymous auction conducted by Exponential last August. Several chip companies participated in the auction, including Intel, Advanced Micro Devices, and Cirrus.
S3 accounted for the patent purchase, which cost between $5 and $10 million, in $17 million worth of write-offs in the most recent quarter.
The purchase helps answer one of the major questions facing the graphics chipmaker: namely, whether the company will branch out from the increasingly competitive graphics processor market. Although once a leader in the field, S3 faded from the front of the pack last year and became caught up in the unforgiving market.
The company recently signed a graphics cross-licensing deal with Cirrus, but few analysts saw seeds of a turnaround then. Even S3 executives have said that the graphics processor market will continue to be difficult and will radically consolidate over the next year.
By the same token, a move toward building full-fledged semiconductors raises the question whether the company will be able to compete with market behemoth Intel.
"Oh my god...That's all they need," said one semiconductor executive.
Even if nothing is done with the Exponential patents, however, analysts say they provide valuable leverage against Intel.
In 1996 and early 1997, Exponential was an up-and-coming power in the semiconductor industry. The company had developed plans for a microprocessor chip that can understand both CISC and RISC instruction sets. Such a chip would allow a single computer to understand programs written for both Intel- and PowerPC-based computers, respectively.
Understanding both CISC and RISC is also the goal of the "Merced" chip, the next-generation processor being developed by Intel and Hewlett-Packard. The Merced technology, due out in 1999, is already patented. (Intel is an investor in CNET: The Computer Network.)
Exponential filed for its various patents first, however, giving those plans status as "prior art" over the Merced patents. With this designation, the Exponential patents can theoretically supersede Intel's patents in the event that they are similar or cover similar processes.
Thus S3 can use the portfolio to build its own chips, or use them to extract deals out of the chip giant.
"They could use it to get into some kind of barter arrangement with Intel," mused Ashok Kumar, semiconductor analyst at Loewenbaum & Company.
The ultimate victor in the Exponential patent bid remained anonymous, although at the time it was determined that the winner paid more than $5.1 million for the patent portfolio. Intel was assumed to be the winner, but sources close to that company recently stated that Intel in fact did not win the auction. The putative purchase has yet to be confirmed with S3.
Exponential sold the patents to cure its own debt problems. In 1996, Apple had signed on to become a customer for the company's X704 processor. However, by May 1997, the deal had gone sour and Apple canceled the contract. The two sides have been locked in a dispute over which company was to blame ever since.
In any event, Exponential was forced to lay of its workers and close its doors. Funds used from the auction were eventually used to compensate former employees, who didn't receive their last paychecks.
After the final round of the auction last August, Stephanie Dorris, Exponential's CFO, stated that the amount yielded from the auction did not match Exponential's $10 million of outstanding debt, but would cover a good portion of it.
"There was not enough to cover the total debt," she said at the time, "but from the standpoint of the employees they will probably be taken care of. They are our first priority."
Meanwhile, S3 executives have said that the graphics market has become increasingly competitive and will likely see consolidation.
"There are 35 people that are going to announce products this year and another 10 we think are going to announce products," said Glenn Schuster, director of marketing for mainstream graphics products at the company. "That means there are 45 people working on products in the same market. We feel in a year to two years there will be a half dozen."
Despite the competition, S3 remains committed to graphics processors. This year, two separate high-end chips are due from the company, according to Schuster.
Most of the company's current volume is going into sub-$1,000 computers, Schuster said, adding that S3 will provide products for the sub-$800 and sub-$600 markets as well.