Intel's Hold Over Key Patents An Obstacle For Graphics-Chip Makers
Dow Jones Online News, Thursday, December 03, 1998 at 08:52
By Dean Takahashi, Staff Reporter of The Wall Street Journal
NEW YORK -(Dow Jones)- Semiconductor makers are racing to improve
graphics on personal computers by delivering a new level of
miniaturization. But first they have to get past Intel Corp.
Makers of graphics chips hope to integrate their products with
another category of chips, the "core logic" components that route data
between the computer's central microprocessor chip and other parts of
the system. Cutting down on chips helps PC makers save money, and some
market watchers think such integrated products could capture much of the
market for sub-$1,000 machines and laptop computers.
But there is a hurdle. Intel (INTC), the Santa Clara, Calif.
microprocessor giant, holds key patents on the data pathway that
connects core logic and the microprocessor. The situation has graphics
chip makers scrambling for legal shelter, hoping to cut a licensing deal
that could protect them from litigation for infringing Intel's patents.
"People are putting down speed bumps that you have to get around,"
said Samuel Liu, chief executive of Silicon Integrated Systems, a
Taiwanese company that makes an integrated graphics and core logic chip
set. Liu believes his company's products don't infringe on Intel's
patents, but the company still is negotiating with the semiconductor
giant because customers may feel more comfortable if Intel issues a
license. It may sound risky, Liu says, "but tell me a business that is
not dangerous."
Getting a license isn't easy. For one thing, Intel is believed to be
holding out for stiff royalties. Intel is also planning its own product
in the field, an integrated chip, code-named Whitney, that is expected
next year.
Via Technologies Inc., another Taiwanese company, last week reached a
cross-license agreement with Intel after talks that stretched on for a
year. Via will pay royalties to Intel in exchange for rights to make
chip sets that use the patented data pathway associated with Intel's
Pentium II microprocessor. Neither company is discussing financial
terms, but Intel makes it clear that it was an attractive proposition.
"We get access to some patents and they have to pay a royalty," Intel
said. "We will license in exchange of value for value."
Paying royalties to Intel isn't the only way out. Another route is to
arrange to have chips manufactured by another company that has a broad
patent cross-license with Intel. Acer Labs Inc., another Taiwanese chip
maker whose largest shareholder is Acer Inc., says it has an arrangement
with a licensed manufacturer. Companies with licenses include
International Business Machines Corp. (IBM) and National Semiconductor
Corp. (NSM).
Still another route is to acquire patents that might pose problems
for Intel, using those as leverage to negotiate a cross-licensing deal.
S3 Inc. (SIII), of Santa Clara, Calif., used that approach and is
negotiating Intel over a license that would allow it to make an
integrated chip.
ATI Technologies Inc. (ATYTF), of Thornhill, Ontario, recently paid
$67 million to buy startup Chromatic Research Inc. to get technology
needed for integrated products. Henry Quan, vice president of marketing
at ATI, says the deal expanded the company's patent arsenal. "All you
need is one good patent to have a defensive position," he said.
Some graphics vendors believe, perhaps wishfully, that Intel won't
sue while it is under investigation by the Federal Trade Commission,
which has questioned the way Intel wields its patents against customers
and partners. But Intel isn't the only one asserting patent rights in
graphics.
S3, Silicon Graphics Inc. (SGI) and 3Dfx Interactive Inc. (TDFX) have
all sued other graphics chip makers. Nvidia Inc., another graphics chip
maker, has been sued four times in the past year as it prepares for its
initial public offering.
"It's like the Cold War," said Lew Paceley, an Nvidia marketing vice
president. "When all the sides are armed with nuclear weapons, then
nobody launches."
The pressure may increase when Intel introduces Whitney, which
analysts expect to have a big impact on the market because of the
company's manufacturing and marketing power.
"The graphics industry as a whole is losing money and it could go
from bad to worse as Intel comes out with Whitney," said Michael Slater,
principal analyst at Micro Design Resources Inc. in Sebastopol, Calif.
"Some graphics players could get locked out of the mainstream market if
they don't have a license."
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