The spinoff, dubbed Frontpath, will focus on Internet appliances and services for the home, the companies said. S3 also noted that Frontpath's first Internet appliance will feature a wireless broadband connection and a relatively large display screen.
"By creating a wholly owned subsidiary, we have given tremendous autonomy to the Frontpath team," Ken Potashner, CEO of Santa Clara, Calif.-based S3, said in a statement.
Frontpath, which will also be based in Santa Clara, will initially work on striking alliances with other companies. The new company will be headed by Janet Leising, the former senior vice president of business development at graphics chipmaker 3dfx Interactive.
Market researcher International Data Corp. forecasts that the Internet appliance business will be a $17.8 billion market by 2004.
Once focused solely on chips for PCs and graphics chipsets, S3 has been remaking itself during the past year to focus increasingly on consumer technology products.
In April, the company said it was selling its graphics chip unit to Taiwan's Via Technologies. This followed the company's $165 million acquisition of Diamond Multimedia. Diamond makes home networking and communications hardware but has more recently become better known for its Rio line of portable MP3 players.
Since the merger, Diamond has expanded its focus to include digital music players for the home and car. The company has also started partnerships with third parties, including Nike and Dell Computer, to create specialized digital music products.
Other chipmakers, stymied by decreasing margins on PC processors and falling component prices, have also homed in on the booming appliance space. In June, Intel announced the Dot.Station, a Linux-based countertop device designed for Internet access. National Semiconductor and 3Com have both been working on similar products.
Sources said this week that the 3Com appliance has been delayed.