New Rio Player to Debut; Diamond Multimedia Acquired by S3, Inc.

The high-end audio industry may be in a slump, but the public's appetite for recorded music appears as voracious as ever. MP3, the hottest upstart in the digital audio market, got a big boost in late June when Diamond Multimedia Systems Inc. announced the next generation of its popular Rio digital music player, the Rio PMP 500, due to arrive in stores this fall.

At $269, the new PMP 500 offers several advantages over its predecessor, the PMP 300. The 500 can handle up to two hours of music in the MP3 format, or in several other formats, including Microsoft's Windows Media Audio. The device will play copyright-protected tunes regardless of the standard that is ultimately adopted by the music industry, company officials claim. It's also compatible with Macintosh computers. The first Rio worked only with computers running Windows operating systems.

The original Rio and the associated rage for downloading music from the Internet blind-sided the music-industry establishment in 1998, when the little player first went on sale. Music on compact discs can be copied as digital files, compressed into the MP3 format, and transferred over the Internet to music fans anywhere in the world. The music industry has been scrambling ever since to come up with a workable solution to the problem of copyright infringement. Diamond sold approximately 200,000 of the Rio PMP 300 players, which are still available at $119 each. Only non-encrypted music can be played on them.

Almost concurrently with the announcement of its new player, Diamond Multimedia agreed to be purchased by graphics chipmaker S3 Inc., of Santa Clara, California. Diamond will be acquired for stock variously reported at between $160 million and $180 million in value. In addition to its Rio digital music players, Diamond makes 3-D graphics accelerator boards for computers, which account for up to 70% of its business, and is also moving into wireless communications. S3, a company only one third the size of the one it is acquiring, will integrate its chips into Diamond's boards.

Diamond now operates RioPort, a website selling music, audio books, foreign-language courses, and other audio-related products. Other companies are jumping on the MP3 phenomenon, among them Creative Labs (of Soundblaster PC card fame) and Sony Corporation, both of which have digital music players in development. Another newcomer is MP3kit.com, which offers a small, inexpensive PC board that can plug into an IDE hard-disk drive to create a long-playing MP3 machine. Properly configured, the MP3 kit can hold up to 12 hours of music.

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