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Gigapixel sells following Xbox surprise

The graphics chip start-up that almost won a place inside Microsoft's Xbox is acquired by 3dfx Interactive for $186 million.

Gigapixel, the graphics chip start-up that almost won a place inside Microsoft's Xbox, has been sold for approximately $186 million to 3Dfx Interactive.

Founded by former designers from Silicon Graphics, Gigapixel was working on a high-speed graphics chip that Microsoft had considered for its upcoming gaming console. The two companies at the time were working fairly closely. Gigapixel's engineering team worked out of offices for WebTV, which Microsoft owns, according to Gigapixel executives.

Days before Bill Gates unveiled the Xbox, however, Microsoft decided to go with a graphics chip from Nvidia. The decision to go with Nvidia came as a surprise, as some analysts said that they had been told that Gigapixel had the contract.

3dfx, which is going through a rebuilding process, will use the technology to move into graphics chips for devices, the company said. The company will complete the Gigapixel transaction through a stock swap.

"We are on the verge of an exciting new era of 3D display capabilities," Dr. Alex Leupp, president and CEO of 3dfx, said in a prepared statement. "The graphical displays on today's PDAs, cell phones and Internet appliances are lackluster at best. With this transaction, we are now positioned to be the leader in providing advanced 3D technology to enable the era of true three-dimensional visual communication for all consumer electronics devices."

The acquisition is the latest in a string of purchases in the hyper-competitive graphics chip market. Although these chips are becoming more complex and difficult to design, profits continue to elude many companies because of the abundance of chip designers.

The history of 3dfx in many ways illustrates the rapid pace of change in the market. In 1997, 3dfx was on the top of the performance pile with its Voodoo 2 chip, which enjoyed a cult following among PC game enthusiasts.

Although popular, the Voodoo 2 was also expensive, and the company found itself competing on price in many markets. Other chips soon came out that surpassed the Voodoo 2 in performance as well. Last August, the company reported losses of $11.5 million for the quarter that ended in July, which sent its stock tumbling. The year before, the company posted a $9 million profit for the same period.

CEO Greg Ballard abruptly resigned in October.