The Rio story - dawn of a new era?

In May 1998, Bill Schroeder was being pitched on a new stand-alone music playing device.

It would be known as the Rio.

Schroeder, the CEO of Diamond Multimedia Inc., understood that the proposal represented a departure from his company's bread-and butter graphics board business. But Schroeder gave the go-ahead without thinking twice because he understood that change was afoot.

For some time, the company had been looking for PC-centric, multimedia devices that didn't require consumers to crack open their computers -- and the proposed cigarette-box-sized device fit the bill. With computer users reluctant to want open up their PCs to add functionality, manufacturers of multimedia graphics boards face an increasingly uncertain future. By signing off on the Rio, Schroeder was taking a big first step away from a market with increasingly dim prospects for growth. "For several years, we have been pursuing ideas that are outside the box -- both literally and figuratively," Schroeder said. "As the PC proliferates, more and more of them will not be opened. To expand our market, we need to let people upgrade their systems without requiring them to open up their PC."

To make upgrading more friendly has always been a problem. Yet, now the popularity of low-cost PCs has turned the problem into a crisis. With sub-$1,000 PCs practically jumping off the shelves, computer makers are buying fewer of the powerful graphics and sound boards sold by Diamond and its rival Creative Technologies Ltd.

Both companies have been hurt.

At Creative, earnings are down 44 percent for the most recent 12-month period. Over the same period, Diamond's losses increased by 41 percent.

"You're seeing [fewer] manufacturers put the frills on PCs than they have in the past," said Matt Sargent, an analyst with market survey firm ZD Market Intelligence. That's a troubling harbinger, considering how sales to PC makers account for as much as 70 percent of revenues for the two companies. Yet, Diamond and Creative are also feeling the pressure at retail. "The whole demographic of new users are generally people who know less about their computer," he said. "They're the ones who will balk at cracking the case of a PC."

The upshot: fewer users are buying off-the-shelf upgrade kits.

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