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Firms Seek to Channel TI's TV-Chip Success

http://startup.wsj.com/ideas/hitechonline/20041022-mcwilliams.html

By GARY MCWILLIAMS
Staff Reporter of The Wall Street Journal.

From The Wall Street Journal Online


Sales of big-screen TVs are soaring, and many of them are projection sets powered by a novel chip from Texas Instruments Inc. that creates images by bouncing light off a million or more microscopic mirrors.

Now, the success of that "micromirror" chip has prompted a wave of start-ups to try to develop cheaper and more powerful versions of the fingernail-size device.

Money and engineering talent are piling into these new companies, which hope to charge less than half the $350 to $500 a chip that analysts say Texas Instruments charges. The start-ups believe that will enable TV makers to slash in half the $3,000 to $10,000 price of today's high-definition big-screen sets when combined with other efficiencies the new companies hope to introduce.

Sales of micromirror chips to TV manufacturers and projector makers are expected to hit nearly $900 million this year, and top-tier venture capitalists that once dismissed the consumer-electronics field as too risky are betting their cash on the start-ups. Sevin Rosen Funds, Sequoia Capital and J.P. Morgan Chase & Co.'s J.P. Morgan Partners, among others, have invested nearly $100 million combined in companies including Keyotee Inc. of Austin, Texas, Miradia Inc. of Santa Clara, Calif., and Reflectivity Inc. of Sunnyvale, Calif.

Texas Instruments spent hundreds of millions of dollars over 20 years on the painstaking development of its Digital Light Processor chip. Only this year has the investment paid off with widespread adoption by makers of big-screen TVs and projectors for home-theater setups, which shine the TV image on a wall or screen.

Already, two dozen TV makers and a dozen makers of home-theater projectors use DLP chips. In addition, 40 more companies make the lenses, color wheels and other critical components used in conjunction with the TI chip to produce the big-screen pictures. The start-up mirror-chip makers, which expect to begin producing their competing devices in late 2005 or 2006, hope to use these same suppliers. They "will be able to leverage a whole bunch of the groundwork that TI has already done," says Ram Velidi, a Sevin Rosen partner.

Rather than produce out-and-out knockoffs, the start-ups are pursuing new design and manufacturing tricks to reduce the cost and size of the guts of projection TVs. Miradia, for example, sculpts its mirrors entirely from silicon, instead of the more expensive aluminum layer that TI uses to make its mirrors. "It's a new way of making this device," says Miradia Chief Executive Officer Greg Miller.

Of course, projection technology is just one way to build a big-screen set. Rival technologies include plasma, which produces big screens that can be hung on a wall, and liquid-crystal displays, now moving up into 30-inch and larger-size sets. Projection TV supporters say plasma's high power consumption and tendency to fade over time could crimp its growth; and LCD screens, while ultrathin, will remain expensive to build in larger sizes.

As a result, the TI chip has been rapidly gaining market share. In the second quarter, some 53% of advanced TVs sold with a screen bigger than 30 inches were projection sets, and TI's chip powered nearly half of them, according to market researcher Quixel Research LLC, Portland, Ore. Following projection sets, plasma accounted for 27% of the sales of these big screens while LCD TVs racked up a 9% share. And some 11% of units sold in the big-screen market were home-theater projectors -- many of which are powered by the same TI chip.

Micromirror chips have been boosted recently by the stumbles of two large backers of rival projection-chip technology known as liquid-crystal on silicon, or LCoS. Last week , Philips Electronics NV threw in the towel on developing and producing LCoS-based sets, saying it instead may market other makers' projection TVs under its brands. In August, IntelCorp. conceded its LCoS chips wouldn't be ready for market this year as promised.

TI has "educated the industry that these [micromirrors] are a high-performance, low-cost and long-lived technology," says Don Wood, a partner at Vanguard Ventures, which recently helped raise $18 million for Reflectivity.

TI's head of DLP products shrugs off the threat from the start-ups. "Anyone can build [a micromirror chip] but to be able to produce them in a very cost-effective manner at the high volume and reliability levels that the consumer electronics industry demands is a huge, huge undertaking," says John Van Scoter, senior vice president and general manager of DLP products.

The Dallas-based chip maker also has a long history of aggressively defending its patents. Over the years, it has received settlements worth as much as $1 billion for its computer-chip patents, and it has obtained over 500 patents on DLP technology.

Why would anyone want to tangle with TI? "My view is no one wants an Intel of televisions," says Bob Duboc, Reflectivity's CEO, referring to Intel's position as the dominant maker of personal-computer microprocessor chips.

Other start-ups say their novel designs and processing techniques should avoid any legal entanglements. And all of these companies expect to begin shipping their first chips to customers as TI's earliest micromirror patents, filed in the mid-1980s, expire.

Brian M. Alger, an analyst at Pacific Growth Equities LLC, says Reflectivity's recent financing raised enough money so the young company could aggressively defend itself against any patent litigation. Vanguard's Mr. Woods says: "There's a very strong syndicate that's backing this company,"

The potential rewards to the start-ups could be large. Consumers are expected to replace some 250 million TVs with digital sets over the next five to 10 years. And TVs aren't the only market. Keyotee (the name is a phonetic allusion to the tragicomic hero Don Quixote) says its micromirror chips eventually will show up in cellphone screens, or possibly as tiny projectors built into phones. That may not be as outlandish as it sounds: Qualcomm Inc., the big cellphone chip maker, recently paid $170 million for Iridigm Inc., another micromirror start-up.