SiS, which makes Intel-compatible chipsets, is close to signing an agreement with Intel regarding the rights to make Pentium II chipsets, according to the Taiwanese company. The chipset, together with the main Pentium II processor, forms the core of a personal computer.
An Intel spokesperson declined to comment. A number of industry sources familiar with the year-long talks between the two companies say that a final outcome is still not certain since talks can break down at any time before the final agreement is signed.
But one person familiar with the negotiations said SiS may have had a change of heart when another major chipset supplier cut a deal with Intel.
Last week, Via Technologies, the world's second-largest chipset supplier, and Intel reached an agreement that covers Pentium II patent cross-licensing and protects Via from litigation in the event that its technology infringes on Intel patents.
SiS now appears amenable to a deal. "To provide 200 percent assurance to our customers, we have aggressively negotiated with Intel for the patent for over one year. We are now close to consummating the deal," a spokesperson at SiS said.
But these deals can come at a high price since Intel is intensely protective of its Pentium II intellectual property. Indeed, until very recently the Pentium II architecture remained highly proprietary to Intel and virtually closed to competing chipset makers.
Some sources state that it can cost the chipset supplier, in royalties to Intel, more than $2 a chip. "That's a big chunk of the selling price, especially when you consider they sell for about only $20 apiece," said Nathan Brookwood, an independent chip analyst in Saratoga, California.
Of course, there's a good reason for that. The Pentium II market is a lucrative one--and one Intel invented. Like the processor, the chipset is a part of the PC's nervous system and allows Intel to control the feature set of the PC and thereby the market.
Conversely, new rivals can alter the competitive landscape. If alternative suppliers emerge, they can offer core PC features that Intel might not offer in a timely fashion--or offer at all.
Right now that is not the case. "There is arguably no [Intel] competition today," said Dean McCarron, a principal at Mercury Research, a marketing research house.
Indeed, this is what Intel intended. "We made a business decision to protect intellectual property associated with the P6," said Intel spokesperson Chuck Mulloy. "P6" refers to the basic Pentium II architecture.
This isn't the way things always were, however.
Both the 386 and 486 generations of Intel processors generated small fortunes for dozens of chipset makers back in the late 1980s and early 1990s. Intel wasn't even on the radar screen. "In the heyday, there were 40 to 50 companies," and Intel wasn't one of them, said McCarron.
The reasons for this are complicated, but Intel's hand was forced to some extent, according to analysts. When it came out with the Pentium processor, vendors did not have stable, competitive products ready, according to McCarron.
"Third parties did not have product in place," he said. This essentially served to jump-start Intel's chipset business.
"They always had a chipset option but never got much support inside the company [until then]...but this greatly incentivized Intel to take control of the chipset business," he added.
Intel now dominates the market. In 1997, Intel had about 70 percent of the chipset business, according to Mercury Research. In the relatively lucrative Pentium II chipset market this year, McCarron predicts that Intel will have well over 90 percent of the market.
In 1998, the total market for processors is estimated to be about 117 million units, with about 50 percent of this Pentium II, according to Mercury Research. Since each of these processors requires a chipset, this is not an inconsequential revenue stream for Intel either. In 1997, the firm made roughly $1.7 billion dollars making chipsets, McCarron said.
Brookwood said Intel accelerated the pace of the business too quickly and eliminated profit margins when it got into the market in earnest. "The established players were slow to respond [to the Pentium in 1993]...and Intel had its foot on the accelerator and wouldn't let up," according to Brookwood. "Intel said, 'We can give you a high-performance part at only marginally more than the low end [chipset] guys.'"
So, while the VLSIs and Chips and Technologies of the world retreated, Taiwanese-based vendors like Via and SiS emerged as fairly strong players in the Pentium business. Via chipsets, for instance, are often used with Advanced Micro Devices K6 series of Pentium-compatible processors by major PC manufacturers such as Compaq.
The problem is that these chipsets are tied to the older "Socket 7" Pentium design. Though Socket 7 is doing well in the low end of the PC market, the lucrative midrange and high end of the market, on the other hand, are almost exclusively based on the Pentium II where PC makers such as Dell Computer, Gateway, and Compaq sell systems for $1,200 and up. Moreover, Intel is also doing a better job of penetrating the low-end market with its Celeron chip, a derivative of the Pentium II architecture. Finally, the notebook PC market, one of the last bastions of high profit margins, is moving rapidly to the Pentium II.
These are the markets that Via, SiS, and Acer's chipset group have had trouble penetrating.
Importantly, the newest chipsets from Via and SiS provide examples of how competitive--potentially better--products can be stifled by strong claims to intellectual property, backed by a dominant market position.
Both companies are selling Pentium II chipsets that integrate a graphics processor. The graphics processor to date has been a discrete component offered separately and at a relatively high cost to the PC manufacturer. But SiS and Via can now offer a relatively inexpensive Pentium II chipset product that gives PC vendors more bang for the buck, especially in the low end of the market. Intel is also planning to offer a similar product, but not until next spring.
Products like this that offer more value than Intel chips give Via and SiS even more reason to seek out large customers, which is at least part of the reason Via signed an agreement with Intel. Large customers need a guarantee that all components are above board and that they will not be vulnerable to lawsuits.
But questions still remain about why chipset makers sign deals with Intel. Complicating the picture is a legal concept based on foundry rights. This means that any chip vendor using a manufacturing facility that already has standing rights to manufacture Intel-compatible chips can do so without fear of reprisals from Intel.
It is rumored that at least one of the top suppliers--Via, SiS, or Acer--have an arrangement with an IBM manufacturing facility. The mystery is why anyone would go to Intel and agree to pay royalties and cross license their own patents if they are already protected in a foundry relationship. "That's the question that I keep asking everyone," said McCarron.
Other industry sources believe that SiS, like Via, needs to cut a deal with Intel to provide the extra insurance big customers demand. "Their reason is that they wanted something that was completely on the up and up," said one industry source. But this person is mystified also. "It's really a very muddy picture when you think about it."
Intel is an investor in CNET: The Computer Network, publisher of News.com.
CNET News.com's Stephen Shankland contributed to this report.