today announced plans to spin off its embedded
products chip-design business, but the new company already faces several large
financial challenges, including an apparent struggle to retain a major
contract for supplying chip technology to Nintendo's
next-generation game system,
As previously reported, workstation maker SGI will spin off the group that develops and licenses MIPS processor designs to chip manufacturers in the embedded market, which includes handheld devices, video games, and television set-top boxes.
Under the plan, SGI will hold an 80 percent stake in the new company, while MIPS will hold 20 percent. The goal is take the MIPS company public by the end of June.
SGI will keep the high-end portion of the MIPS processor business, which designs the chips that are used in its Unix-based workstations and servers.
The move comes as Richard Belluzzo, a highly regarded industry veteran who was named SGI's chairman and chief executive last January, looks for ways to propel the company forward. SGI, which plans to announce third-quarter results April 21, has already warned it expects a loss for the period, which would mark a third consecutive quarter of losses.
SGI Unix workstations, instrumental in creating special effects for scores
of movies including hits such as Jurassic Park and Terminator
2, have established a strong reputation in the entertainment industry
as the crème de la crème of graphics computers. But declining
sales in this business and stalled marketing efforts on the server side are
expected to contribute to weak third-quarter results, the company said.
SGI's spin-off too seems to face hard times. Sources close to the company
say it is struggling to retain a major contract for the next-generation Nintendo gaming machine. In the past,
SGI MIPS processors have been the main silicon engine for Nintendo game
Constance Sweeney, an SGI spokeswoman, declined to comment on SGI's MIPS
plans or the company's contract with Nintendo. In 1993, SGI won a joint
development and licensing agreement to supply the microprocessor
technology, the 64-bit MIPS RISC chip, for Nintendo's 64-bit platform.
In an an interview with NEWS.COM today, Belluzo said he could not comment on
the Nintendo issue. He noted, however, that the spin-off company will not be relying on a single customer, like Nintendo, for its success.
He pointed to the MIPS processors being used by WebTV and in devices loaded
with the Windows CE operating system.
Formerly pleased with its relationship with SGI, Nintendo became
nervous last year after SGI announced that long-standing chairman and CEO
Edward McCracken would step down, former employees said. Last winter,
Nintendo decided to explore other options because it was concerned about
the level of commitment that the new, as yet unnamed, SGI CEO would give to
its product, sources added. As a result, Nintendo did not renew its
contract within an deadline established by SGI.
Royalties from Nintendo 64's hardware and software sales make up a sizable
portion of the MIPS Group revenue, contributing about $45 million annually,
according to former employees. One source noted that the revenue stream
from Nintendo royalties will remain "quite healthy" for the next three to
four years. But once the next version of the Nintendo video game console
is released, royalties from the Nintendo 64 will decline.
Jim Turley, senior editor of the Microprocessor Report, noted that
chips bought by Nintendo and Sony's
PlayStation represent about 66 to 75 percent of units shipped by the MIPS
Although the MIPS Group is the only designer for the Nintendo 64, it faces
several large competitors as it turns its attention to chip designs for
embedded devices in the Windows CE market, Turley said. Rivals include Hitachi and Advanced Risc Machines (ARM).
"If MIPS lost Nintendo, they would have to at least double their Windows CE
business," Turley said, pointing out that MIPS already does virtually half of
the chip designing business for Windows CE, and Hitachi the other half.
But a former employee noted it would be difficult to do both the chips for
Nintendo's next-generation game console and the rapidly expanding embedded
Elsewhere, MIPS is faring well in the TV set-top box business. General Instrument announced last month that
MIPS licensee Quantum Effect Design
will supply processors for General
Instrument's DCT-5000+ advanced interactive digital cable box. This could
result in chip sales well into the millions.
The new MIPS company is also likely to find it needs to ramp up its
investment in research and development.
Peter ffoulkes, a workstation analyst at Dataquest, conjectured that
questions surrounding the future viability of the MIPS platform at the high
end of SGI's server and workstation offerings may also affect the new
company's future as a leader in embedded systems.
SGI's high-end MIPS designs eventually migrate down for use in embedded
devices, currently savings the MIPS group a lot of additional research and
"You can pop them [low-end embedded chips] out like peas," ffoulkes
said. But, to do that, "you need top-down development."
Therefore, if chip designs for the high-end machines go, the future of the
low-end becomes a question mark.
"If you look at things they are selling into the Nintendo systems, Sony
PlayStation, etc., they are basically selling into areas that want
reasonable performance. They are selling low-cost 64-bit chips. They're
selling essentially the designs that went into their high-end workstations
a few years ago, things like the R2000, R3000. Those had to come from
somewhere," ffoulkes said.
But one former employee contended the migration from the high-end chips is
not all that easy. Said the source: "This is pretty much the conventional
wisdom, but it doesn't really apply anymore because present-day high-end
designs are too complicated and carry too much baggage to be competitive in
the embedded market."
Meanwhile, last week, SGI filed a trade secret violation lawsuit against Artx, a graphic design company believe by many analysts to be an SGI competitor in the Nintendo arena. Also named in the suit were Artx chief executive Wei Yen and the company's technology guru, Tim Van Hook. Yen, who founded Artx in September, is a former SGI senior vice president who guided the company's Nintendo operation. Van Hook, also a former SGI employee, was a key architect for the Nintendo 64 platform.
"I not only want to get the company performing to where it needs to, but we will also be protecting our intellectual property and we intend to reinforce this," Belluzzo said.
The lawsuit, which is under seal in Santa Clara County Superior Court,
alleges that Artx, Yen, and Van Hook put their SGI knowledge to use over
the past several months, said John Sullivan, vice president and general
counsel for SGI. He declined to comment on whether those projects included
developing Nintendo's next-generation gaming platform.
Van Hook declined to comment and Yen did not return phone calls.