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S3 Buys MP3 Car Player Maker empeg - Stay Tuned

Santa Clara-based S3 Inc. has finally ditched its razor-thin margins graphic chip roots in favor of MP3s and home networking. The Silicon Valley graybeard has parlayed a deal to pawn its graphics chip unit to Taiwan's Via Technologies for about $320 million in stock and cash. To punctuate the move away from its core business, S3 will undergo a name-change to SONICblue (proposed ticker SBLU), effective November 15th. And there are welcome signs that investors, who have watched the chipmaker's stock suffer a 60% haircut since mid-April, will finally have a silver lining to look forward to.

S3 made the fortuitous $125 million land-grab of Diamond Multimedia last year, along with the firm's Diamond Rio portable MP3 player. Like Sir Isaac Newton's revelation of universal gravitation prompted by the fall of an apple, S3 awoke to the overwhelming popularity of its Rio division, easily overshadowing the dwindling potential in its PC graphics unit. That epiphany led S3 to reshuffle itself into a holding company for a handful of business units that include Rio, its developer of portable MP3 players; Diamond, its Internet access products division; frontpath, its wireless Net appliance maker; and HomeFree, its home networking arm.

But a real meat-and-potatoes development that could spice things up for SONICblue investors is the company's recently announced acquisition of U.K.-based empeg. This start-up makes an MP3 car stereo system built on an embedded Linux OS. The nifty empeg digital audio drive was one of the first companies to cook up a working commercial MP3 car player, and it's a niche that boasts explosive growth opportunities in the midst of mainstream America's love affair with peer-to-peer file swapping service Napster.

While the opportunity is there, the competition in this nascent space is also following the growing money-trail. Well-known Kenwood rushed to market with its in-dash eXcelon priced at a highbrow $750 a pop. While the product makes the grade, most penny-pinching consumers feeling the "wealth effect" have a case of sticker-shock after amassing an enviable MP3 collection for next to nothing. Why spin your free tunes on a player that'll set you back such a chunk of change?

Despite cost concerns, the unit thrived with little competition because its next closest rival, Aiwa, had been boasting cheaper vaporware for more than a year without producing a workable unit. All that changed last month when Aiwa began shipping backorders for its car player priced at a reasonable $300, and early reviews peg the unit as the thoroughbred to beat. So where does that leave SONICblue's empeg? Well, for starters, the empeg player's biggest barrier to entry starts with its price tag at a sizable $1200.

The good news is that empeg boasts a built-in hard drive for easy MP3 storage. Both aforementioned rivals' car players only spin regular CDs and CD-Rewritables (CD-RW). While that's a head-and-shoulders advancement over plain-vanilla CD players, consumers will still have to spring for a CD-RW drive for the desktop if they intend to tote their Napster collections into the ol' automobile. If empeg can trim the cost of its MP3 car unit and continue to aggressively promote its hard drive storage solution, the upstart has a legitimate chance at biting off a piece of the MP3 car player pie. As for investors wondering whether S3's name change will mean a change for the better, they might want to consider giving this old dog a second glance to see what's cooking over at SONICblue.