TAIWAN'S VIA Technologies has made official what everyone watching the graphics chip market expected as it took over full management of S3 Corp's PC graphics business. The deal surprised few, but for VIA it just might represent a new tack in its legal battles with Intel Corp over the disputed P6 bus license.

VIA is expected to use S3's technology to offer a PC processor with an integrated graphics capability that would compete with Intel's forthcoming Timna CPU, expected later this year. The deal has VIA paying S3 about $323 million in cash and stock. While nominally an extension of the existing joint venture between the companies, most observers see the move as a spinoff for S3, which has its eyes on the exploding market for Internet appliances and consumer devices such as MP3 players.

And while the deal does not include a transfer of S3's license of Intel's P6 bus intellectual property — presumably because the license is not transferable — VIA and S3 will continue to remain partners in a sort of symbiotic relationship.

S3 said in a joint press release with VIA that it will "explore alternative strategies, including partnerships and joint ventures, relative to its ongoing multimedia board business."

VIA's authorization to use P6 bus is the subject of an international legal dispute with Intel. The dispute dates back to 1998, when VIA licensed the Intel-developed bus for use in PC chipsets. But problems arose when VIA began to promote its Apollo Pro Plus and Apollo Pro133 chipsets, which support PC 133 SDRAMs as system memory. Intel, which has endorsed Rambus DRAMs, sued VIA.

Intel in November widened its legal offensive against VIA, filing multiple lawsuits in the United Kingdom and in Singapore. The UK suit also names motherboard maker First International Computer Inc. (FIC) and KNS Components Ltd, alleging patent infringement of the P6 bus microarchitecture. FIC is an affiliate of Formosa Plastics Group, which is VIA's corporate parent.

But the relationship between VIA and S3 may turn out to be a workaround from VIA's point of view. With S3 keeping its board business, it will still acquire its graphics chips from the S3/VIA joint venture, potentially allowing VIA to ride on the coattails of S3's licensing agreement with Intel.

Intel apparently has considered the possibility. Chuck Mulloy, Intel spokesman, said his company is watching the two companies closely.

"The license to S3, without going into specifics, is very targeted at what S3 used to do, which was graphics," Mulloy said. "We don't expect it to have any impact on the current litigation."

Linley Gwennap, principal of The Linley Group in Mountain View, California, says Intel would have taken considerable pains in its licensing terms with S3 to prevent VIA from benefiting from it.

"I would imagine that Intel would have put in considerable safeguards against S3's laundering processors or chipsets for VIA," Gwennap said.

But Guy Wright, senior anlayst at Jon Peddie Associates in Mill Valley, California, says that at least in the minds of some people, the deal is specifically aimed at getting around Intel's licensing restrictions.

"It depends on which side of the Pacific Ocean you read your news reports on," Wright said. "In Asia, sneaking around Intel's license is exactly the reason for this deal. Yet on this side over here, Intel has already said that the license is not transferable. But I think that license is at least part of the reason that VIA was interested in S3 in the first place. But then VIA has been buying little pieces of S3 for some time now, so this is really no surprise."

Some analysts were surprised that the acquisition received any more attention than an after-the-fact mention.

"What did surprise me is that we even heard about it beforehand," said Peter Glaskowsky, graphics chip
analyst with Cahners MicroDesign Resources, Sebastopol, California. "S3 must have wanted to see if anyone else was interested, only to learn that it could get its best deal from VIA."

Whatever VIA's plans for the graphics unit, everything will come down to a question of execution, says John Latta, president of Fourth Wave Inc., an Alexandria, Virginia-based consulting firm.

"Here we have a Taiwanese company that has collected three major companies in the last year, two with x86 intellectual property, [Cyrix from National Semiconductor Corp and the Centaur Design Group from Integrated Device Technology Inc] and now one with graphics," he said. "Yet all were struggling in very competitive markets," Latta says. "Just to imply that integration is the answer is only one approach to address the market. VIA must carry out its strategy by selling parts to many companies to fill a wide range of devices, including PCs. VIA gets an 8 for boldness, but a 3 for execution to date."

For S3's part, it will essentially refocus its attention on the market segments covered by Diamond Multimedia Inc, which it acquired in September of last year. On the same day of the of VIA deal, it announced its intentions to refocus itself on Internet appliance-related markets, key among them the Rio brand of portable MP3 music players and home networking products. S3 said this segment recorded 46 percent revenue growth in its fourth quarter.

This change in corporate mission would be S3's third, Gwennap said, noting that the company started out in the chipset business before leaving that space to focus on PC graphics. Now it is abandoning the graphics business to focus on Internet appliances.

Arik Hesseldahl

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