I ran across this article from March of '97. Near the bottom they talk about InnovaCom's chip putting CUBE out of business by the end of '97. Sound familiar?
C-Cube is making a mint from its video compression chips, but its ultimate customers are far from kosher.
Pirate's best friend
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By Jeffrey Young
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C-CUBE MICROSYSTEMS is on one of those rocket trajectories you have come to expect from Silicon Valley. This Milpitas, Calif. firm sells chips that compress and decompress digital video. Overnight, these chips are in huge demand: C-Cube's sales leapt from $125 million in 1995 to $320 million last year, and income from ongoing operations doubled, to $60 million.
Alas, some of this is based on pretty questionable business. C-Cube is making most of its profits by selling hardware made more valuable by a booming bootleg sector in Asia. C-Cube is working diligently to redirect its talents to nonpirate markets, but the competition is going to be stiffer there.
The piracy part of the business revolves around a movie format called video CD. By digitally compressing a video image, a video CD can store a 74-minute movie on a single 5 1/2-inch platter. This CD is like a videotape, except for two things: First, as a digital format, it facilitates perfect copying. Second, the platter costs a lot less to manufacture (70 cents) than a videotape ($2).
The first difference explains why video CDs are virtually unknown in the U.S.: Hollywood refuses to release movies on a medium that allows any amateur to make perfect copies. The second difference explains why video CDs are a hit in China. With copyright enforcement somewhere between lax and nonexistent, pirated movies are a big business, typically retailing in back alleys for $3 or $4. The pirates start with a legitimate copy of a movie on videotape, create a digital master, then crank out thousands of cheap video CD copies.
Buyers of these bootleg CDs are the many Chinese who own video CD players, manufactured by such outfits as Idall and Shinco. It is not illegal to own one of these players in the U.S., much less in China, but if you want to watch a movie on it, you're limited to a handful of legitimate Hollywood releases, Chinese films or thousands of pirated movies available on any street corner in Asia.
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<Picture: Bridge.>ÿYou can see it in the sales breakdowns. Overseas sales of video CD players came to 1.7 million in 1995, the largest first-year sales of any consumer electronics product ever, C-Cube claims. In 1996 the number of units sold jumped to nearly 7 million. Which country bought the most? China, of course.
Go one step back from Idall and Shinco and the trail leads to C-Cube Microsystems. It supplies the chips used to display video in 85% of these video CD players, as well as the systems used to produce the digital video CD master.
Any guilt pangs in Milpitas? "We're not responsible for what our customers do with our products," says Alexandre Balkanski, 36, the French-born, Harvard-educated (Ph.D., 1986) economist who runs C-Cube. Anyway, Balkanski says, the movie people brought it on themselves. After his firm designed its decoder chip in 1991, he says, he made calls on the world's biggest studios and record companies, "begging them to release products for the format. They showed us the door."
One thing is clear: Without the copyright infringers overseas, C-Cube would probably have closed up shop by now. As recently as 1993 it was losing money on sales of only $24 million. Then the pirates discovered the marvels of its chips. So have competitors. ESS Technology, which sells similar chips, has also been enjoying handsome sales gains in China.
A huge legitimate market for the next generation of this kind of chip is beginning to develop in the rest of the world. These chips are (or will soon be) used in set-top boxes for the newest cable television systems, in the coming DVD (digital video disk) format, in computers that play video and in camcorders, picture phones and more. Hollywood has endorsed DVD because the players will be rigged to make copying difficult.
Can Balkanski make a graceful transition into this far larger market? He will try. But he faces an army of competitors. Toshiba, Sony and Matsushita are already making the DVD decoders. These large, vertically integrated companies want to supply the decoder chip themselves, and C-Cube's main customers for video CD chips, the electronics assemblers in China, lack the sophistication to quickly graduate to the DVD market.
In the video encoding portion of DVD (the essential first step for converting a traditional film or video into digital video), C-Cube might already have been outsmarted by a smaller California firm, InnovaCom, of Santa Clara. InnovaCom has designed a single chip that it says can do the encoding compression. InnovaCom has arranged to have the chip fabricated in Taiwan and aims to have it on sale by mid-1997. That puts it ahead of C-Cube.
C-Cube could be on a rocket trajectory that is near its peak. ÿ <Picture>
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