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S3 splits Diamond into hardware, Net units

Setting its sights on an initial public offering, digital music distributor RioPort gets a $30 million infusion, spinning off from its parent company, graphics chipmaker S3.

    Setting its sights on an initial public offering, digital music distributor RioPort got a $30 million infusion today, spinning off from its parent company, graphics chipmaker S3.

    With new financing from Oak Investment Partners and Microsoft cofounder Paul Allen's Vulcan Ventures, RioPort has officially positioned itself as a Net company. RioPort's software allows users to buy, collect, play, and download digital audio tracks through its Web site and those of its partners or through portable devices such as Diamond Multimedia's Rio 500. RioPort also designs digital music delivery systems for third-party hardware companies, such as PC-TV devices.

    RioPort was a subsidiary of Diamond Multimedia, which S3 acquired this summer and planned to divide.

    S3 is splitting its hardware division and Net content arm at a time when the online music scene is booming and on the heels of Net music firm MP3.com's successful IPO, which attracted big-name investors such as Cox Interactive.

    "This is about actually getting money in the bank so we can operate as an independent company," said RioPort CFO Wade Meyercord.

    "In the Net space, the business model is much more toward generating users to build revenue off of them in the long run," he added. "What RioPort does is to get the content from the big music labels--content people would be willing to pay for through our Web site or our partners--and provide the security for the content so it can't be pirated."

    RioPort, which supports various digital music formats from MP3 to Windows Media Audio, also relaunched its Web site today, offering music, books, and comedy tracks in MP3 and Windows Media Audio formats.

    The company hopes to eventually make money by selling digital downloads. RioPort already has a deal with Universal Music to distribute its artists' tracks via its own Web site and its partners' Web sites, including those for MTV, Nickelodeon, and VH-1.

    These alliances and the venture funding are building blocks for a RioPort IPO.

    "Absolutely--we're thinking along the lines of [an IPO for] this spring," Meyercord said.

    RioPort will compete with sites such as MP3.com and EMusic.com, as well as with RealNetworks' RealJukebox, which has a music distribution deal with Warner Music Group. On the device side, Diamond's Rio is vying for market share with Creative Labs' Nomad, the Lyra by RCA, and eventually Sony, which will introduce its digital music device early next year.

    But RioPort has the advantage of marketing its music portal to Diamond's Rio 500 users.

    "They're jumping into a very crowded content space, but they can bring music to one place and leverage the Rio brand," said Forrester Research analyst Mark Hardie.

    RioPort won't start selling digital music for at least a few more months, however, because of the music industry's fight over security standards to prevent copyrighted music from being illegally distributed, Meyercord said.

    "We're not delivering anything yet, because we have to find out which format and security are going to be widely used," he said. "What RioPort brings to the party is the ability to sort all of that out for the user, because if the user is not Net savvy, they're going to say, 'To hell with this.'"