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S3 hears sweet music with MP3 plans

The graphics chip giant turned Net appliance company is pushing an ambitious plan to integrate popular digital music download technology into new products and markets.

S3, the graphics chip giant turned Net appliance company, is pushing an ambitious plan to integrate popular MP3 digital music download technology into numerous products and markets.

Consumers can soon expect to see MP3 music players integrated into cell phones and handheld organizers, said chief executive Ken Potasher. Following its acquisition of Diamond Multimedia last June, S3 is working to use Diamond's expertise in consumer electronics to push players and other gadgets focused on the popular MP3 format. Diamond makes the Rio portable digital music player.

The company is entering a highly competitive market, however. Consumer electronics giant Sony has released a new version of its Walkman and a minuscule device dubbed "Music Clip" for playing MP3s. Creative Labs and other Asian manufacturers specializing in inexpensive electronics goods are producing cheap MP3 players. And as with personal computers, these devices will become more powerful as well as less expensive as the technology improves.

"MP3 is one of those things where the first generation of devices are single function. Once you see that it makes sense, you can combine MP3 functionality almost for free," said Linley Gwennap, principal at the Linley Group. "A standalone MP3 player probably doesn't make a lot of sense in the long run."

To remain ahead of the competition, Potasher says several products are in the works. A stereo-like player dubbed the RioRack will allow consumers to download MP3 files directly from the Internet for playback. The device is expected to hit the market in the next two months. Also, S3 is building digital music players for cars. A proliferation of basic Rio players, marketed in conjunction with other corporate partners, can also be expected.

Under these deals, a company such as Hewlett-Packard or Fidelity Investments would sell MP3 players co-branded with S3. In turn, S3 would "get a substantial cut" of customer revenues.

"We've signed some strategic partners over the last six months, " Potasher said.

CNET TV: Diamond Rio 500
CNET TV: Diamond Rio 500


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S3's plans represent its revised corporate face. Although it once ranked as Silicon Valley's premier graphics chip designer, S3 last week sold its business to Taiwan's Via Technologies for $323 million. In the future, it will largely concentrate on products for home networking, digital subscriber line (DSL) modems and Internet entertainment appliances.

"We're at the cusp of a huge business," said Potasher, estimating that the market for playing digital files could grow to $800 million in a few years.

The shift shows S3's desire to move out of the highly competitive market for graphics chips into a new, Net-focused niche. Once a market leader, S3 more than two years ago started to fall behind more nimble rivals and watched its earnings and revenues numbers slide.

Although the company had a brief comeback in 1999 with its Savage 4 graphics chip, its executives saw the writing on the wall and began to turn an interested ear toward the Internet.

"If you go back a year or so ago, the thinking was, 'Gee. Are we going to be around?'" said Potasher. "The best we could do was come out with a product that would give us the right to survive one more cycle."

Another project slated for the end of the year is a device named "Web pad." Some simply will be portable screens that display information stored or processed on a home PC. More deluxe pads will incorporate a hard drive and a faster processor, effectively functioning as portable computers, Potasher said.

Along with the other projects, S3 plans to negotiate more content and record deals to expand its music offerings for the format. Several deals have been signed with publishers but have not been announced, Potasher said.

CNET TV: MP3 player demo
CNET TV: MP3 player demo


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S3's plan to ingratiate the technology into a variety of markets has strong potential, analysts say. Pushing MP3 into new devices doesn't cost much, or require a great deal of additional technological resources. One of the chief costs could be adding more flash memory to devices so that they can store large numbers of MP3 files, said Linley Group's Gwennap.

An integration plan will also help the company avoid being undercut by overseas manufacturers. Revenue for Diamond's Rio has grown 76 percent on a year-to-year basis, according to the company, but copycats can always erode an early advantage. Sony has invaded the market, as have Taiwanese manufacturers specializing in low-cost consumer electronics.

Price competition seems inevitable, according to most analysts.

"It is another overpopulated market that is going to be taken over by low-cost competitors from Asia," that don't carry the burden of research and marketing, said Jon Peddie, principal at Jon Peddie Associates, a Mill Valley, Calif.-based consulting firm.