S3 strengthened by Intel pact

Graphics chip rivals to license each other's technology for next 10 years.

Graphics-chip maker S3 Inc. strengthened its position for the coming year through a broad cross-licensing deal with PC chip giant Intel Corp., said an analyst on Thursday.

"Ultimately, this is a good move for them," said Dean McCarron, principal analyst with PC chip watcher Mercury Research Inc. "This will protect S3 from any legal disputes with Intel, which is really good." S3 and Intel -- rivals in the graphics chip market -- announced a deal Thursday to license each other's technology over a 10-year period. As part of the agreement, S3 has licensed the bus design for Intel's current and future PC processors.

More integration to come
McCarron believes the deal opens up the way for S3 to develop and market integrated products that combine graphics chips and the PC's core chipsets that control the flow of data along a PC's "bus." "They get a bus license out of this deal," he said. "That means they can make a chipset product and won't have to use a [licensed facility] -- that reduces their costs." Currently, graphics chips communicate with the PC processor through the system bus.

In the future that will change. "Clearly, the market is moving towards higher levels of integration today," said Rick Bergman, vice president of marketing for S3. "Integration will be one of the big factors of the next year."

The idea is not new for S3. The company previously had an initiative, dubbed Plato, underway to integrate the core chipset and graphics chips. "We have gone down this path before," said Bergman. "We have expertise within the company already."

On the comeback trail?
For S3, the move is another step in its plan to stop its downward slide in the market and get back into the No. 1 slot.

While its latest 3-D graphics chip, the Savage 3-D, got the technical thumbs up from the industry in August, sales have been tepid. "Savage established us as a real 3-D vendor," said Bergman. "But from a commercial standpoint, it has been a little disappointing."

Yet, the Santa Clara, Calif., company's deal with Intel (Nasdaq:INTC) has another major benefit -- S3 will be one of the first to test its chips with Intel's forthcoming quadruple-speed advanced graphics port, or AGP.

As part of the deal, Intel will purchase warrants that will give the company the option to buy shares of S3 in the future. S3's stock rose $1.38 to $6.41 on the news.


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