Dependence on Accelerator Product Line
S3's products are designed to improve the graphics and multimedia
performance of Pentium-based PCs and Microsoft Windows, Windows NT and IBM OS/2
operating systems, the predominant standards in today's PC market. Any shift
away from such standards would require the Company to develop new products. The
Company expects that additional specialized graphics processing and general
purpose computing capabilities will be integrated into future versions of Intel
and other Pentium-based microprocessors and that standard multimedia
accelerators in the future will likely integrate memory, system logic, audio,
communications or other additional functions. The Company has not previously
offered either single function or integrated accelerator products that provide
these functions, which have traditionally been provided by separate single
function chips or chipsets. The Company has been and will continue to be
required to expand the scope of its research and development efforts to provide
these functions, which will require the hiring of engineers skilled in the
respective areas and additional management and coordination among the Company's
design and engineering groups. Alternatively, the Company may find it necessary
or desirable to license or acquire technology to enable the Company to provide
these functions, and there can be no assurance that any such technology will be
available for license or purchase on terms acceptable to the Company.
Furthermore, there is a limited amount of space on PC motherboards, and
companies that offer solutions that provide the greatest amount of functionality
within this limited space may have a competitive advantage. While the Company's
strategy is to develop new and enhanced graphics and multimedia accelerator
products that will be complementary to present and future versions of Intel and
other Pentium-based microprocessors and integrate additional functionality,
there can be no assurance that the Company will be able to develop such new or
enhanced products in a timely manner or correctly anticipate the additional
functionality that will be required to compete effectively in this market. There
can be no assurance that, if developed, the Company's new or enhanced products
that incorporate these functions will achieve market acceptance. There also can
be no assurance that the market for graphics and multimedia accelerators will
continue to grow in the future or that new technological developments or changes
in standards will not result in decreased demand for graphics and multimedia
accelerators or for the Company's products that are not
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compatible with such changed standards. For example, in 1996, there was an
absence of an industry standard 3D graphics API. As a result, the Company
developed and promoted its proprietary API. Microsoft has since introduced its
Direct3D API, which has emerged as the standard API for 3D acceleration. While
the Company's 3D accelerators currently support the Company's proprietary API
and Microsoft's Direct 3D API, there can be no assurance that another API will
emerge as an industry standard that the Company's accelerators will not support.
While the PC industry in recent periods has been characterized by substantial
demand, such demand has historically been cyclical, and there can be no
assurance that this demand will continue in future periods or that demand for
the Company's products will continue. The occurrence of any such events would
have a material adverse effect on the Company's operating results.
Substantial Competition
The market for the Company's products is extremely competitive and is
characterized by declining selling prices over the life of a particular product
and rapid technological changes. The Company's principal competitors for
graphics accelerators include ATI Technologies, Inc., Cirrus Logic, Inc., Matrox
Graphics Inc., and Trident Microsystems, Inc. The Company's principal
competitors in the multimedia market include the companies named in the
preceding sentence and a number of smaller companies which may have greater
flexibility to address specific market needs. Potential competitors in these
markets include both large and emerging domestic and foreign semiconductor
companies. In particular, there is a significant number of established and
emerging companies that have developed, are developing or have announced plans
to develop 3D graphics chips, including Intel Corporation and Lockheed Martin
Corporation, which have announced that they are jointly developing such chips,
which are currently expected to become available in the second half of 1997, and
Texas Instruments Incorporated, which has announced a development and marketing
agreement with 3Dlabs Inc., Ltd. In addition, Intel Corporation has entered into
a definitive agreement to acquire Chips and Technologies, Inc., a leading
provider of accelerators for the mobile PC market. There can be no assurance
that the Company's product offerings to address the demand for the next
generation of 2D/3D accelerators will be competitive, and if such product
offerings are not competitive, the Company's results of operations in 1997 and
future periods could be materially and adversely affected. The entry of
additional competitors into the 2D/3D accelerator market has resulted in and is
expected to continue to result in pricing pressures on average selling prices of
the Company's products. To the extent the Company expands its product line to
add products with additional functionality, it will encounter substantial
competition from established semiconductor companies and may experience
competition from companies designing chips based on different technologies, such
as software-centric multimedia processors. Further, the need of PC manufacturers
to rapidly introduce a variety of products aimed at different segments of the PC
market may lead to the shift by such system OEMs to the purchase of graphics and
multimedia add-in cards provided by others. Certain of the Company's competitors
supply both add-in cards and accelerator chips, which may provide those
competitors with an advantage over suppliers such as the companies that supply
only accelerator chips. In addition, certain of the Company's potential
competitors that supply add-in cards and/or motherboards, such as Intel
Corporation, may seek to use their card/board business to leverage the startup
of their graphics accelerator business. Certain of the Company's current and
potential competitors have greater technical, manufacturing, financial and
marketing |
