Digital audio market in flux

Electronic News, March 9, 1998 by Peter Brown

San Jose, Calif.--Over the past few months the digital audio market has undergone profound changes. What once was a thriving market, with new entrants joining seemingly every month, has been scaled back to about a half-dozen companies competing for PC OEM design wins. The sights of a company terminating its audio business, selling specific portions of the business, and of acquisitions and lawsuits have become common, including a legal action initiated by Creative Technology against Aureal Semiconductor last week.

The exodus from the digital audio market could reverse itself, however, as PC vendors move to the Microsoft PC '99 specification. The move to PCI audio in PCs started on a limited basis last year but this year PC OEMs are already beginning to feel the pressure to move to a PCI bus because of Microsoft's PC '99 specifications that call for all PCs to have a PCI audio device by 1999. Observers believe this might be reason enough for new semiconductor companies to enter the market in the near future.

Late last week, graphics market sales leader Creative Technology filed a patent infringement lawsuit in federal court in the Northern District of California against Aureal Semiconductor charging that Aureal's Vortex 8820 digital audio processor violates U.S. patent No. 5,342,990. The patent, held by a Creative Technology subsidiary, Scotts Valley, Calif.-based E-MU Systems, is titled "Digital Sampling Instrument Employing Cache-Memory" and describes specific implementation for an electronic musical instrument designed by E-MU.

Aureal rejected the allegations and said it plans to vigorously defend itself. Toni Schneider, VP of marketing for Aureal, asserted that the lawsuit is in retaliation for designs Aureal won with Dell Computer recently. He termed it "an intimidation tactic" and said that the lawsuit was being used as a "95 percent marketing weapon and only based on 5 percent technical issues."

John Danforth, VP and general counsel at Creative Labs, responded that there is no link to the Dell design win whatsoever and said the Aureal product was simply the first the company obtained in its investigation of possible patent violations. Mr. Danforth said Creative Labs is reviewing a variety of audio products in the marketplace and he hinted this may be only the first of numerous lawsuits over the patent.

"We feel this is a strong case and we looked very carefully at what we brought to the lawsuit. This is a patent that reflects years of investment and reflects very well on the work of our E-MU subsidiary. We are trying to protect our intellectual property rights and did not create this lawsuit in haste." Creative Labs is asking for damages and an injunction prohibiting production of the Vortex chip by Aureal.

Tip Of The Iceberg

The lawsuit between the audio companies was the most recent development in an ongoing whirlwind of activity in the digital audio market. Over the past few months, three companies have exited the audio market entirely to focus on core businesses, one has refocused its efforts and another attempted to reaffirm its commitment through an acquisition.

"The PC audio market is very attractive but I think a number of companies have tried to enter the market without the correct background to be successful," said George Alexy, who heads marketing at Cirrus Logic and is responsible for chief technologies at the company. "You are seeing companies attempt to carve out a spot in the market but (they) do not have the technical depth to do so and now are back to focusing on key strengths and abandoning their audio initiatives." Mr. Alexy claims that Cirrus Logic is the current leader in PCI audio with more than 30 percent market share.

The change from an ISA-based audio technology to a PCI-based audio technology brought a tremendous opportunity for many companies to begin moving into this market. Many audio companies claimed last year the audio ISA bus would be replaced by the PCI bus in most PCs. However, no one told the PC OEMs who continued to manufacture a majority of their systems with an ISA audio bus and manufactured only a limited amount ot PCI audio product. During that time, S3, Oak Technology, Opti and VLSI Technology all entered the market to compete with Creative Labs, Aureal, Cirrus, ESS Technology and Yamaha.

Since that time, Opti, S3 and Oak Technology have all exited the market to concentrate on their core businesses. It began with VLSI, which made a strategic decision to end development of its SongBird digital audio device. The company was late in bringing the device to market and, by the time it was ready to begin production, had developed its ThunderBird audio device that would be more applicable for market needs, VLSI said. VLSI last month rolled out the ThunderBird in its second run at the audio market (EN, Feb. 9).

Oak followed suit, terminating both its graphics IC and digital audio lines simultaneously (EN, Feb. 2). Oak claims it needed to concentrate more on its three profitable businesses: optical storage, consumer electronics, and digital office equipment. "You could say we tried to do too much, too fast and had a lot of risk factors involved that didn't make sense," said Scott Alberts, director of business development at Oak at the time of the audio/graphics termination.