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Graphics chip business tags another body

Manufacturers used to be a dime a dozen, but the crowded field is thinning out in a hurry. NeoMagic says it will now focus on the market for Net appliances.

PC graphics chip manufacturers used to be thick on the ground, but the market is thinning in a hurry.

NeoMagic, which has been one of the major designers of graphics chips for notebooks in recent years, announced today it will shift its strategic direction to making processors for Internet appliances and wireless communications devices.

"We have refined our technology directions, added some new executives to our management team, and made head-count changes to keep expenses down while we implement new products," Prakash Agarwal, chief executive officer of NeoMagic, said in a statement. "Our PC-centered view of the world has changed."

About one-third of its employees will be let go, the company said.

With the change in direction, NeoMagic becomes the fifth graphics specialist to shift course just this year. On April 11, S3 announced that it was selling its PC graphics division to a joint venture controlled by Taiwan's Via Technologies. The day before, 3DLabs, which makes graphics chips for workstations, scooped up Intergraph's Intense 3D graphics division.

In March, 3dfx Interactive bought Gigapixel, which almost won the contract for installing graphics chips into Microsoft's Xbox game console, for $186 million. The month before that, ATI Technologies picked up ArtX for $400 million.

In many respects, the graphics chip industry has been a victim of both the flourishing potential and crushing competition of the semiconductor business. Graphics chips, although elegantly complex, are also fairly easy to design. A number of companies were drawn to the market in the mid-90's. Competition intensified and the industry ended up with too many players trying to outdo one another to land contracts that often didn't pay the bills.

Five years ago, there were approximately 70 companies that claimed to be working on graphics chips, said Jon Peddie, president of Jon Peddie Associates, a Mill Valley, Calif.-based consulting group. Approximately two years ago, 40 companies claimed to be working on graphics technology. Now, the number hovers around 10 to 15 and will likely continue to shrink.

"We will end up with three major suppliers, three second-tier suppliers and some uncountable number of ne'er-do-wells," Peddie said earlier this month.

Santa Clara, Calif.-based NeoMagic won't completely exit the graphics world. In its new life, the company will concentrate on "wireless media processors," which it describes as communications chips that can process images.

NeoMagic also will continue to produce its MagicMedia 256 family of notebook products. Otherwise, the company is drawing the curtain on its PC business.

The company's stock hit a 52-week low of $2.69 at the start of the week. As recently as February, NeoMagic had been trading about $10.