S3, Intel in tech licensing deal

Graphics vendor S3 has become the latest company to land a technology licensing deal with Intel, a trend that may lead to the emergence of low-cost parts for set-top boxes, information appliances, and cheap computers based on Intel ideas.

The agreement--which follows a technology swap between Via Technologies and Intel, and is expected to be followed by deals between the chip giant, SiS, Acer Laboratories, and others--will likely have far reaching implications for the industry.

In the future, Intel-based parts won't just come from Intel. Instead, they will emerge from a series of smaller competitors like S3, which plans to produce new 3D chips, chipsets with 3D capabilities for inexpensive computers, and even processors for handheld computers and the like that depend upon Intel intellectual property.

Not only will this mean cheaper parts, it will lead potentially to the further expansion of Intel's chip technology in the low-end computer market and even non-PC markets.

And the fact that Intel plans to license its technology more freely may weaken the case brought by the Federal Trade Commission. One of the big issues for the trial, which starts February 23, is whether Intel limits access to its intellectual property to browbeat competitors and customers.

In the agreement announced today, S3 and Intel have entered into a 10-year technology cross license pact, which allows S3 to use certain semiconductor patents and intellectual property rights. S3 has the rights to incorporate into products the "P6" bus, which is used in conjunction with Intel microprocessors and other technology, said Chuck Mulloy, an Intel spokesman. (Intel is an investor in CNET: The Computer Network, publisher of News.com.)

Intel also agreed to purchase warrants, or options, which gives the company the right to buy shares of S3 in the future. Financial terms were not disclosed.

S3's product plans
S3 said it plans to use the patents to incorporate additional functionality into its current graphics processor line, as well as come out with a new series of chips for "set-top boxes, WinCE machines, consumer appliances, industrial point-of-sale systems, and automotive GPS systems," according to a statement from S3.

The first products to emerge from the deal will be 3D graphics chips that support the next version of the Accelerated Graphics Port (AGP), a PC architecture innovation from Intel that speeds up graphics processing. These will emerge in the first half of 1999, said Rich Bergman, vice president of marketing at S3. "Integrated" chipsets, which will combine 3D graphics functions as well as some of the input-output functions handled by standard chipsets, will also emerge.

Processors for set-top boxes and handhelds won't start appearing until the next century, he added. How and where these processors emerge will likely become an interesting issue. Enhancing Mulloy's statements, Bergman said that S3 has access to all of Intel's patents, including patents to the Pentium II. S3, however, is limited in how the company can incorporate these patents into actual products.

In any event, S3 has "no desire to develop microprocessors that will compete head to head against Intel," Bergman said. But, because Intel is not as yet entrenched in the handheld or set-top market, the deal could see the emergence of S3 system-on-a-chip devices. These chips could serve as microprocessors or merely graphics chips. S3 is being fairly cryptic on the subject, but executives at the company have said that S3's intellectual property portofolio creates "opportunities."

Intel avoids Merced fight
Intel, for its part, will gain access to S3's patents. While it is unclear whether Intel will incorporate any S3 technology into its products, the deal may quell a potential legal problem for Intel. Observers have said that the patents S3 acquired from Exponential earlier this year gave S3 a weighty claim for patent infringement against Intel.

The Exponential patents allegedly superseded Intel's patents on Merced, its future server chip, according to Richard Belgard, a patent analyst, and gave S3 potential rights against Intel. S3 launched patent infringement suits against two other companies earlier this year.

"The Exponential patents look like the motivator for Intel," said Belgard.

Intel, which historically hasn't jumped into many technology agreements, appears to be changing its tune. Earlier this month, the company signed a deal with chipset maker Via Technologies, which will allow the company to make "P6" chipsets. SiS, another chipset vendor, said it is on the verge of inking a deal with the chip giant. Further deals are expected from other vendors, said Dean McCarron, an analyst at Mercury Research.

Motives for deal abound
Why is Intel taking these steps? One reason is financial, according to Nathan Brookwood, a chip consultant with Insight 64. Intel charges fairly hefty fees for its licenses. Sources earlier in the year said Intel was asking close to $5 per chipset. The final terms in the Via agreement are lower, sources have said, but Intel will still make money on the deal.

There may also be the legal angle. "With licensing deals, the monopoly angle--at least on the chipset side--would go away," said McCarron.

Mulloy said that the timing of the Via deal and the S3 deal was coincidental and does not have bearing on other matters.

S3 for its part primarily sought the deal as a way to get back into the graphics market, said Bergman. The company suffered mightily when it failed to come out with a cutting-edge chip with the initial release of AGP.

Today's deal will help ensure that S3 doesn't miss another design cycle. In addition, as integrated chipsets become more popular, S3 will not have to worry about getting access to bus technology. Other competitors who have not signed deals with Intel, however, might.