Is PortalPlayer in Play?

Apple's decision not to use one of the outfit's chips could be a victory for Samsung -- and may leave PortalPlayer vulnerable to a takeover

For most of its life chip maker PortalPlayer was known best as the "Intel of the iPod." It's a reference to the key role its chips play for Apple's popular digital music player, much the same way Intel's semiconductors run computers.

PortalPlayer is a small company, not known for seeking much of the spotlight, despite the success of the MP3 for which is has long supplied various chips. But this week PortalPlayer (PLAY) disclosed that a forthcoming chip won't be showing up in a planned version of Apple's (AAPL) iPod nano. PortalPlayer stock promptly shed $9.46, or nearly 42% of its value, and more than $220 million in market value.

Apple generally doesn't discuss future products, nor its manufacturing or component supply strategies. It had no comment on the matter. But theories about who may have been the beneficiary of PortalPlayer's misfortune are abounding.

Apple's iPod nano constitutes about 60% of PortalPlayer's business, says analyst Tayyib Shah of Longbow Research in Cleveland. "I don't know what Apple's plan is for the rest of the year, if it's planning a refresh of the current generation of iPod nano, or if there's something different coming," he says, noting that PortalPlayer is still selling chips to Apple for the current line of iPod nano, and in a video-playing version of the iPod.


Some analysts speculated that PortalPlayer's latest chip, due later this year, may have been too feature-rich and therefore too expensive for Apple's needs. "Apple's main competition is a bunch of no-name manufacturers, and when you're dealing with them, you have to be price competitive, says analyst Christopher Chaney, with Stanford Financial Group in Boca Raton, Fla. "PortalPlayer may have just failed to be more aggressive on the price."

So whose chip will Apple use? There are a few suspects. The leading candidate appears to be Samsung, already one of Apple's main suppliers for so-called NAND flash memory. Samsung, which makes chips that might be a suitable replacement for the PortalPlayer chip, may have offered Apple an attractive package deal involving the chip and flash memory, says Chris Crotty, an analyst at consultancy iSuppli. "Samsung has gotten more aggressive with offering deals to some customers to take both chips together."

Other potential suppliers include Sigmatel (SGTL), which has supplied Apple with chips used in the iPod shuffle, its other flash-memory based player line. Its stock was up 38 cents, or more than 4%, on PortalPlayer's news.

Additionally, Crotty says Apple may have cast a disapproving eye on PortalPlayer's having landed a deal recently to supply chips to a line of MP3s made by rival SanDisk (SNDK).


The loss of some of Apple's business and the resulting stock decline could make PortalPlayer an inviting acquisition target. With less than $180 million in cash and short-term investments on hand, it's trading for less than twice its cash position.

Potential acquirers, Chaney says, could include Texas Instruments (TXN), which recently launched a media processor called DaVinci aimed at video applications, and has $5.3 billion in cash and short-term investments. Other candidates include Broadcom (BRCM), which has a chip in the newest video-capable line of iPods and $1.7 billion in cash, or Marvell Technology Group (MRVL) which has about $920 million in cash. "I think among this group of chip companies there's a period of merger and acquisition activity coming up," Chaney says.

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