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OCTOBER 20, 2004
By Alex Salkever PortalPlayer's Bid to Join iPod's Party [Page 2 of 2] PLAGUES OF LAWYERS. Chip experts say it would be difficult for Apple to throw over PortalPlayer for a competitor, a move that would entail rebuilding iPod's innards virtually from scratch. But rising competition from Sigmatel (SGTL ), Telechips, and even chip giant Intel (INTC ) could lead to competing offerings down the road. Those might entice Apple to think differently about its chip-design supplier. Meantime, another tricky aspect of PortalPlayer's business is intellectual property. In the business of designing cutting-edge semiconductors, suits are endemic, often exerting a huge drag on the bottom line as legal costs mount. Witness the legal tribulations of Rambus (RMBS ), another high-profile fabless chip outfit. Rambus' stock has gone from trading at around $35 range in January, 2004, to the $16 range today amid unending rounds of legal battles over who owns the technology. Industry watchers say Apple, in particular, zealously guards the intellectual property around its devices. That could make it harder for PortalPlayer to capitalize on the iPods' success and diversify its revenue stream. Beyond its relationship with Apple, whether PortalPlayer has the patents to keep its technology unique and defensible in the face of rivals is questionable. "Long-term success [in the fabless chip business] requires building a library of intellectual property. I don't know what, if any, IP is held by PortalPlayer. Their music-player chips are all based on industry standards that PortalPlayer doesn't control." says Peter Glaskowsky, the chief systems architect for chip-builder MemoryLogix. BROADER HORIZONS. Underlying all this uncertainty is PortalPlayer's lack of profits. The outfit expects to lose $5 million in 2004. That that is well down from past losses. But considering how well the iPod is selling, some analysts worry that maybe Apple is paying very little for use of the chip design. "I would think that they should be closer to profitability than they are," says Taulli. None of this is to say that PortalPlayer doesn't have a plan. In its IPO filing, PortalPlayer indicates an intention to diversify its business. According to In-Stat/MDR's McCurley, it has an upgraded line of chip designs in the coming months that could allow it to better compete in the hot digital-camera market and make a bigger splash in the very young, but promising, portable digital-video player market. PortalPlayer may also plan to acquire rivals, thus buying growth and intellectual property with the IPO's proceeds. Regardless of the risks, investors impressed by the iPods' popularity will likely embrace PortalPlayer. Over the long haul, however, unless PortalPlayer addresses the risks it faces, it seems an unsure place to bet on the digital jukebox.
 Salkever is technology editor for BusinessWeek Online Edited by Beth Belton
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