The Anglo File: VideoLogic Wants to Turn PC Users Into Couch Potatoes

VideoLogic, which licenses technology that allows PC users to watch TV while using other applications, is hoping to attract longer-term investors.
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LONDON -- There is no doubt the changes taking place at

VideoLogic Group

amount to more than its proposed new name of

Imagination Technologies

. But the reason for investing in this British 3D-graphics technology company -- shares of which hit a three-year high last Wednesday -- remains one of promise as opposed to real results.

VideoLogic's shares rose to 99.5 pence last week after the company announced it had appointed

QED Intellectual Property

, a specialist in patent licensing, to authorize the use of its TV-tuner-card technology to manufacturers. The cards allow users to watch television on their PCs while using other applications -- functionality that will appeal, no doubt, to the computer nerds and coach potatoes in us all.

Alas, the performance of the share price since the news, which neatly coincided with the announcement that Germany's

TEMIC Telefunken Hochfrequenztechnik

will be the first licensee of the technology, is indicative of how investors still view the company as "a case of jam tomorrow," as one analyst put it. VideoLogic's shares have slid 13.4% from the high and closed 2% lower on Wednesday at 86.2 pence.

"In VideoLogic, there are very few long-term investors," says Nainish Bapna, an analyst at

Nomura International

, which has no investment-banking relationship with the company. "It's a favorite of daytraders and it really needs some serious investors in it."

Does VideoLogic merit such "serious investors?" Despite the volatility in stock price, some are beginning to argue that at last, it does.

Powerful Friends and Allies

One reason is that the company is moving to a business model based on royalty revenue rather than one that relies on revenue from manufacturing its own products. This is keeping costs down and the company now delivers gross margins of around 80%.

The company's flagship technology is its patented PowerVR 3D-graphics chip. The chip compares well to its competitors in terms of price and performance, notably because it requires far less memory than do traditional 3D-graphic technologies.

Through the PowerVR chip, VideoLogic has won some powerful support. Japanese chip manufacturer

NEC

(NIPNY)

licensed the technology and then won a deal to supply it for

Sega Enterprises'

(SEGNY)

new

Dreamcast

home-games console. The NEC-produced chip will also be used in Sega's Naomi arcade machines.

France's

STMicroelectronics

(STM) - Get Report

is also incorporating the PowerVR into the next generation of interactive digital set-top boxes, which are due out at the end of this year. STM is the world's largest supplier of decoder chips and integrated circuits for set-top boxes -- a market which, according to the IT consultancy

Dataquest

, is expected to be worth around $4 billion in 2002.

And at the end of June, VideoLogic said its PowerVR 3D-graphics technology would be used in the next generation of

Microsoft

(MSFT) - Get Report

TV set-top boxes.

Microsoft, NEC and STM -- powerful friends indeed. Yet in the short term, at least, the new Imagination Technologies is likely to resemble the VideoLogic of old.

When the Chips Are Down

Just as the company becomes more dependent on royalties, much of this year's earnings will be determined by the popularity of Sega's Dreamcast, which was launched earlier this year to a fairly warm reception. However, the big player in this market remains

Sony

(SNE) - Get Report

. Its

PlayStation2

, which is scheduled for release in Japan later this year and in the U.S. and Europe in early 2000, is expected to be no less popular than its fast-selling predecessor.

VideoLogic remains a very small player in the very large and important PC market, and it did itself no favors with the late delivery this year of its second-generation PC graphics chips.

Finally, the business that VideoLogic is in definitely favors those with deep pockets to fund research and development. While it does receive some funding from its strategic partners, but costs for developing new technologies are cash intensive.

With the convergence of the PC, TV and games console, there is no doubt that VideoLogic is in the right place at the right time and, indeed, moving in the right direction. However, changing names apart, a new company does not appear overnight, and Imagination Technologies is still a chip off the old block.