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S3 strategy unclear

The graphics chipmaker's surprise purchase of Exponential' microprocessor patent portfolio is leaving many scratching their heads.

Graphics chipmaker S3's surprise purchase of the microprocessor patent portfolio of Exponential Technologies is leaving many in the industry scratching their heads, but one theory is that the company may try to get into the integrated microprocessor market.

With the Exponential patents, S3 could develop a microprocessor which, combined with a graphics chip based around S3's own technology, could function as a high-speed, graphics-intensive nerve center for cheap computers or consumer devices.

"They could use them in set-top boxes, handhelds," said Rich Belgard, a semiconductor consultant and contributing editor for The Microprocessor Report. Such a strategy would also allow S3 to branch out of the increasingly competitive graphics market, where S3 is losing share.

The drawback, however, is the price. Developing and marketing microprocessors from the patents could cost anywhere from $10 to $100 million. Such a move would also put the financially shaky company on a collision course with better funded companies, including Intel.

"$20 million is a low-ball figure. $100 million is the general figure," said Dean McCarron, principal analyst at Mercury Research.

Partially as a result of the daunting task that the company would face, other observers state that S3 may simply have bought the patents to improve its core graphics processors or may have its eye on building a patent portfolio that will be useful as a bargaining chip in litigation.

"In a PC environment it would be a co-processor, but in a consumer environment it would be the main processor; but to have even a paper tiger will take four to eight quarters," said Ashok Kumar, semiconductor analyst at Loewenbaum & Company. "For now, they could use it as a lever to get cut into cross-patent agreements.

The deal for the most part comes as a huge surprise. The Exponential patents were auctioned off in a silent, anonymous auction last August, and the exact identity of the buyer had not been known publicly until reported yesterday by CNET's NEWS.COM. Many assumed Intel purchased the patents.

"That would explain why a whole bunch of old Exponential people are at S3," McCarron said.

A plan to make an integrated processor seems to be the most logical conclusion to the deal, but it will be far from easy.

"It doesn't make a lot of sense unless they plan to do an processor," said Peter Glaskowsky, an analyst at The Microprocessor Report specializing in graphics. "But that will cost $20 to $50 million to design and $20 to $50 million more for verification and marketing. I don't think S3 has the resources for that?.It's a mystery."

The price tag may mean that S3 is aiming for more prosaic goals. Michael Hara, director of strategic marketing at Nvidia, stated that a number of companies are considering integrating discreet CPU (central processor unit) functions onto graphics chips. Under current desktop architectures, the CPU, not the graphics processor, controls lighting of images and mathematical transformations.

"They may have been interested in some fundamental technology" in these areas that can be incorporated into a graphics processor, Hara explained.

"It looks like a long-term strategic investment," said Arun Veerappan, semiconductor analyst at Robertson Stephens.

Kumar and others, however, pointed out that the patents themselves could carry leverage in infringement disputes. A number of the patents are similar to patents held on Intel's forthcoming 64-bit "Merced" chip, but predate the Merced patents. Taken in this light, the patents are essentially bargaining chips.

Another observer pointed out that S3 recently acquired a number of patents from Cirrus that could also be used as leverage against potential third parties. The Cirrus patents themselves do not, the person said, seem to be cutting-edge technologies.

S3 itself is being overtly vague about its plans. "As previously stated with the Cirrus Logic patent agreement, increasing the breadth of S3's intellectual property base is an important strategic investment to improve S3's competitive position in the highly competitive graphics market," said Paul Crossley, a spokesman for the company.