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Intel merger raises concerns

Does Intel have its fingers in too many pies? Silicon Valley grumbles about its buyout of the graphics chipmaker Chips and Technologies.

Intel's (INTC) buyout of Chips and Technologies has raised questions about a potentially anticompetitive fallout from the deal.

This sentiment in Silicon Valley follows an assertion by Digital Equipment in July that Intel wields "monopoly power" over processors for personal computers because it controls 90 percent of that market.

This time, however, companies are frightened at the prospect of Intel becoming a major player in graphics chips, despite the fact that Intel has yet to manufacture a single product in this field commercially.

Peter Glaskowsky, senior analyst of graphics chips for Microprocessor Report, said the bigger concern lay in graphics economics, which play to Intel's advantage. Graphics chips have become extremely expensive to make; at the same time, the field is overcrowded.

"It's getting to the point where they have to use the same kind of [production] processes as [the microprocessor] guys. That makes the chip expensive, and margins have gone down significantly," he said. This could give Intel, the most formidable chip manufacturer in the world, a big advantage.

In July, Intel agreed to purchase Chips and Technologies, one of the leading manufacturers of graphics chips for notebook PCs. Intel, C&T, and Real3D, a Lockheed Martin company, have already been jointly developing Intel's upcoming Intel740 graphics chip for desktop PCs and workstations.

"The acquisition is aimed at advancing capabilities for graphics and visual computing in mobile personal computers," Intel said when it announced the deal.

However innocuous it appears, the statement has profound implications for companies such as S3 and Cirrus Logic. Both are major suppliers of graphics chips and could lose market share, or worse, as Intel becomes a major player in this sector.

Cirrus executives recently expressed concern over Intel's newfound enthusiasm for graphics at a seminar in San Francisco. "Over time, Intel has to be viewed as a serious competitor in the graphics chip business," said Tom Kelley, Cirrus's chief operating officer. "We want to reduce our dependency on the graphics chip market," he added.

But S3 may ultimately have more to lose, according to Ashok Kumar, an analyst at Southcoast Capital, a marketing research firm in Austin, Texas. "S3 is petitioning votes [in Silicon Valley] to stop the [Chips and Technologies] acquisition for antitrust reasons. They see this as detrimental to the competitive landscape," he said.

An S3 spokesperson said she found this statement strange and believed that it was not based on anything from S3. But she added that S3 is always worried about new competitors. Intel did not comment.

S3 has been a major supplier of chips for Intel motherboards. A motherboard is the main circuit board used in a PC and holds most of the core electronic components.

Intel, to date, has been virtually absent from the graphics chip market, one of the main chips in a PC. A graphics chip controls the processing of the images that users see on their computer screens. Entry into this market would make Intel a major player in one of the last remaining PC chip markets it does not dominate.

In addition to processors, Intel is already the major supplier of peripheral chips, referred to as chipsets, that work with the processor. Intel is also a large supplier of motherboards to PC vendors.

C&T had about 47 percent of the graphics chip market for notebook PCs in 1996, according to Southcoast's Kumar. But it had only about 9 percent of the desktop market.

Microprocessor Report's Glaskowsky says that requests for an antitrust investigation wouldn't surprise him. He added, however, that the C&T acquisition in no way gives Intel a monopoly.

"Chips and Technologies is an insignificant player in desktop graphics. They have significant share in laptops. S3 is definitely the leader in desktops. I don't think Intel's getting into graphics is any particular concern."

Intel is an investor in CNET: The Computer Network.