SONICblue Incorporated

Origins as S3

The business began in 1989 as S3, a maker of chipsets for personal computers that moved over the following decade into PC graphics chips. That market proved unstable, and by the end of the 1990s the company needed a different direction.

It found one in portable digital audio. On June 16, 1999, Diamond Multimedia prevailed in the copyright action brought against its Rio player by the Recording Industry Association of America, and a week later S3 agreed to buy the company for $173 million. Reports at the time of the agreement put the value of the all-stock transaction somewhere between $160 million and $180 million, and noted that S3 was roughly a third the size of the firm it was acquiring. Diamond drew as much as 70 per cent of its revenue from 3-D accelerator boards, was entering wireless communications, and operated the RioPort download service. Its first player, the PMP 300, had sold about 200,000 units at $119 and handled only unencrypted files; a successor announced the same month, the PMP 500, was priced at $269, held about two hours of audio, supported Windows Media Audio alongside MP3, and worked with Macintosh computers as well as Windows.

Shareholders of both companies approved the merger in September 1999 on terms giving Diamond holders 0.52 S3 shares for each of their own. S3 then split itself into four units: communications, in Vancouver, Washington; multimedia, in Santa Clara, California; professional graphics, in Starnberg, Germany; and RioPort, in San Jose, California. Chief executive Ken Potashner presented the combination as a way of pairing S3's technology with an established consumer brand and its distribution.

Renaming and departure from graphics

S3 announced on November 1, 2000, that it would trade as SONICblue with immediate effect and that its Nasdaq ticker would become SBLU a fortnight later. The graphics operation was being separated into S3-Via, a joint venture with VIA Technologies that had just cleared Taiwan's Ministry of Economic Affairs after an initial refusal four months earlier. Potashner, by then chairman as well as chief executive, described the step as a break with a decade of graphics work and a turn towards digital media and information appliances built around the Rio line, home networking and Internet access products. Within about a year of the Diamond purchase the company had also signed distribution arrangements with Dell and sold Nike-branded versions of the Rio players.

Acquisitions of 2001

In February 2001 SONICblue took over two further consumer electronics businesses, ReplayTV and Sensory Science, in transactions settled in stock. ReplayTV built hard-disk personal video recorders and had reached only about 40,000 service subscriptions; after commercial difficulties it had pulled out of consumer electronics to license its technology instead. Sensory Science made dual-deck videocassette recorders and combined DVD and VCR units, and distributed television sets made by the German manufacturer Loewe. Chief technology officer Andrew Wolfe said the recorder technology might also serve for recording music or as a server for home entertainment networks.

Accounts of the terms differ. The contemporaneous report placed the combined value of the two deals at roughly $128 million, of which about $8 million was attributed to Sensory Science. Writing two years afterwards, Forbes gave $123 million as the sum paid for ReplayTV alone and described the transaction as a purchase of the assets of a bankrupt company.

Litigation

ReplayTV and the studios

SONICblue added a function to the recorders that automatically removed advertising during playback, which brought it into conflict with the television industry. In November 2001 a group of broadcasters and studios including Disney, Paramount, NBC, CBS and ABC sued the company, arguing that its conduct struck at the economic basis of free-to-air television. Two features were at issue: the automatic removal of commercials, and Send Show, which let an owner pass a recorded programme over the Internet to a limited number of other users. Wolfe treated the action as pre-emptive, pointing to the company's intention to sell programming directly from producers and contending that personal computers presented a greater risk of copying yet attracted no comparable litigation. The ReplayTV 4000 range, with capacities from 40 to 320 gigabytes, was due to ship before the end of that month. Forbes counted 28 media companies among the plaintiffs and reported that publicity around the case lifted sales of the recorders for a short period.

The first complaint was filed on October 31, 2001, and further ones followed through November; the plaintiffs sought to have ReplayTV alter its software so that data on how customers used the devices would be reported back to them. An order to that effect was issued on April 26, 2002, and the Electronic Frontier Foundation and Electronic Privacy Information Center filed an amicus curiae brief against disclosure on May 13. The order was later reversed. Forbes dated the order to May 2002 and reported that the company overturned it on appeal. In a filing of March 2002 SONICblue recorded the studios' contention that its planned manufacture and sale of the ReplayTV 4000 amounted to copyright infringement, and stated that the outcome could not then be determined.

The proceedings were suspended when the company entered bankruptcy. They were brought to an end in January 2004, when District Judge Cooper dismissed the remaining declaratory claims: the infringement actions against ReplayTV had been dropped and the copyright owners had given a covenant not to sue, so no live controversy remained and the court lacked jurisdiction under Article III.

Securities and patent claims

The same March 2002 filing reported settlements of a securities class action and related derivative litigation, under which SONICblue was to contribute 2,401,501 of its shares and Deloitte & Touche up to $250,000, at a combined cost to the company, after insurance, of about $8.6 million. It also recorded a patent infringement complaint the company had brought against TiVo and TiVo's counter-complaint.