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S3 sheds graphics business, picks up new name

The new Sonicblue will have three main businesses: the Rio MP3 music player operation, the Frontpath Internet appliance business, and the Access line of home networking gear and modems.

S3 is finally dropping its graphics chip business, at the same time picking up a new name: Sonicblue.

Under a revised deal approved by the Taiwanese government, Via Technologies will get S3's graphics chip business in exchange for returning the 15 percent stake it had in S3 and assuming other liabilities in a deal valued at $323 million.

The new deal, set to close by January, replaces a similarly valued cash and stock deal that deal was held up by Taiwanese regulators.

With the sale, Sonicblue will have three main businesses: the Rio MP3 music player operation, the recently announced Frontpath Internet appliance business, and the Access line of home networking gear and modems. S3 will announce the name change Wednesday.

"We've done what we've said," S3 chief executive Ken Potashner said in an interview Tuesday. Sonicblue will act as a holding company for the three business units and manage the company's stock portfolio, which includes its stake in the Rioport music portal and more than $650 million in stock of Taiwanese chip foundry UMC Group.

The new company will still be losing money, thanks to the start-up costs for its Transmeta-based portable Web tablet business and a $10 million ad campaign with Chiat/Day to advertise its Rio brand of MP3 music players.

However, Potashner said the company should break even by the second quarter of next year. By that point, Sonicblue expects to have significantly expanded its Rio line to include a boom box and two living room players as well as to have debuted its first tablet-sized Web access device based on the Transmeta Crusoe processor.

The ProGear tablet will initially be aimed at areas such as the hotel and medical industries and will sell for a hefty $1,200 to $1,500. Samples of the device, which can surf the Internet wirelessly, will be sent to testers this quarter, with initial sales scheduled for early next year. Later in the year, the unit should find its way into consumers' hands, probably at a price of around $500, subsidized by Internet service providers.

As for the Rio business, S3 has already begun shipping its first living room device, the Rio Receiver. The unit connects to a PC via a home network to access music files. A second category of devices, dubbed Rio Racks, will allow MP3 files to be played without a PC. Those units will cost about $500, with initial shipments late this year and volume sales in the first quarter.

S3 also has just started manufacturing its Rio 800 portable player, which offers twice the base memory of its predecessor along with the ability to upgrade the unit with a better battery or more memory by sliding on a "backpack" accessory.

The company also is in the process of acquiring the British firm Empeg, a move that will allow Sonicblue to start selling MP3 players for the car. That deal should close in the next day or two, Potashner said.

"Clearly, the PC comes out of the equation over time," Potashner said.

Overall, Potashner expects next year's sales from the revamped company to reach $400 million, more than twice this year's results.