C-Cube Microsystems, Inc.

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C-Cube Microsystems, Inc.

1778 McCarthy Boulevard
Milpitas, California 95035
U.S.A.
Telephone: (408) 490-8000
Fax: (408) 490-8132
Web site: http://www.c-cube.com

Public Company
Incorporated: 1988
Employees: 600
Sales: $250 million (2000 est.)
Stock Exchanges: NASDAQ
Ticker Symbol: CUBE
NAIC: 334413 Semiconductor and Related Device Manufacturing

C-Cube Microsystems, Inc. provides enabling silicon technology for image compression and the digital video market. During the 1990s the company pioneered the MPEG digital video standard. For three consecutive years C-Cube was named the world’s top supplier of MPEG digital silicon by Dataquest. In 1995 the company received an Emmy award for technical achievement in digital audio-visual.

1988–94: Developing Semiconductor Products

C-Cube Microsystems was established as a California corporation in July 1988. Its co-founders were the president and CEO, Edmund Sun, who had previously started Weitek Corp.; Alexandre Balkanski, who once chaired the video standards group MPEG (Moving Picture Experts Group); the executive vice-president in charge of marketing, Alain Rossman, who had co-founded Radius Inc.; and Jim Rafferty, co-founder of Cricket Software. The company received financial backing of $13 million from the venture capitalist firm Hambrecht & Quist and from Japan’s Kubota Ltd., a farm equipment manufacturer. Financial support also came from JAFCO America Ventures, raising the overall investment in the company to $15.7 million.

At first, the firm wasn’t certain what kinds of products it would produce. Originally, the founders intended to design high-speed microprocessors. However, a survey of potential customers revealed a strong demand for solutions to image compression.

The company began shipping its first product in early 1990, a single-chip encoder/decoder (codec) for the proposed Joint Photographic Experts Group (JPEG) standard, which was endorsed by the world’s largest standard-setting groups, the International Standards Organization (ISO) and the Consultative Committee on Telecommunications Technology (CCITT). The chip could compress images by 10:1 with no visible degradation and up to 100:1 with varying degrees of degradation. Later in the year C-Cube claimed the chip could compress images by 50 times without degradation. Expected applications included digital cameras and VCRs, color printers and scanners, and high-speed image transmission for local-area networks, modems, and color facsimile systems. It was a unique product that was at least a year ahead of the competition. The product incorporated six patents held by C-Cube. Praising the chip, Microprocessor Report noted, “It’s an exciting and significant advance.”

Other proprietary compression algorithms that were being proposed at the time included Intel Corp.’s DVI algorithm and Philips Consumer Electronics’ CD-I algorithm. The introduction of C-Cube’s monolithic processor, however, brought the industry closer to supporting worldwide, vendor-independent standards. In fact, C-Cube’s chip was introduced before a still-motion standard was approved, although the company maintained that all of the technical issues regarding the standard had been resolved.

As early as 1990, the company was predicting that by 1995 its products would be at the core of multimedia PCs and consumer electronics, as computers, television, and communications all began to converge. They envisioned C-Cube products as being instrumental in converting the consumer market from analog to digital.

The company announced plans in 1990 to introduce an AT-based image-compression board for developers that would contain C-Cube’s CL550 processor to compress and decompress TGA files by 25 times without loss of image quality. By the end of 1990 the company had about 70 employees. It was pursuing joint ventures in Japan to develop products using the CL550 processor. Potential applications included inserting the chip into still cameras to allow pictures to be taken digitally instead of on film. The chip also made it possible to edit video on desktop computers. The chip was also seen as enhancing the development of video telephony.

In 1991 the JPEG standard received additional industry support, as other companies announced products employing the standard and using C-Cube’s CL550 chip. The products included a multimedia workstation from Fluent Machines Inc., PC image-compression boards from Lead Technologies Inc., a PC media compression board from VideoLogic Inc., a video-editing system from Avid Technology Inc., and a full-motion video board from New Media Graphics Corp.

In September 1991 William O’Meara was named president and CEO of C-Cube. He was formerly president and CEO of Headland Technology, an affiliate of LSI Logic Corp., and was described by Fortune as “a veteran semiconductor industry executive.”

C-Cube and Chips and Technologies Inc. partnered to produce a JPEG Video Development Kit for original equipment manufacturers (OEMs) and developers. The $4,000 kit included the CL550 processor and Chips and Technologies’ PC Video window-controller chip on an AT board. The kit, which was scheduled to ship in February 1992, was expected to allow a standard JPEG video-capture method to emerge quickly.

In May 1992 C-Cube announced the immediate availability of production quantities of the first single-chip MPEG decoder. Dubbed the CL450, it was developed in cooperation with Philips and was used in a Philips demonstration of full-screen full-motion video from a CD-ROM. The CL450 and CL450i were compatible with Philips’ CD-I format and the MPEG standard for full motion and color video. They were expected to be used in compact disk-based video systems and compact disk-interactive (CD-I) consumer electronics, including Karaoke machines. C-Cube’s overall sales in 1992 were about $19 million.

In 1993 C-Cube entered into an agreement with Texas Instruments Inc. to exchange video and audio compression circuit technology. The agreement allowed both firms to develop derivative products utilizing the other’s current and future MPEG decoder and JPEG coder/decoder products. Applications included digital cable TV, direct broadcast satellite TV, compact disc, and high definition TV. Previously, Texas Instrument had focused on audio technology, while C-Cube was known for its video circuits. The agreement also gave C-Cube access to TFs production capacity. C-Cube did not have its own fabrication facility and was using four foundries in the United States and Japan. C-Cube also entered into a similar agreement with chipmaker Advanced Micro Devices to gain access to its production facilities.

In 1993 C-Cube became a supplier of VLSI circuits and encoders/decoders for the receiving devices of Thomson Consumer Electronics’ Digital Satellite System (DSS), which was to receive programming from DirecTV. C-Cube’s VLSI circuits would implement the MPEG compression/decompression algorithm, making it possible to have four to eight times the number of channels than was allowed by the current analog DBS systems. C-Cube encoders would be used in satellite uplink equipment, with the decoder chips in RCA receivers.

For 1993–94 C-Cube chips would be used in the new wave of video players from Sony, JVC, Samsung, and others, that would use CD-ROMs instead of cassettes or laser disks. In Japan the chips were being used in video jukeboxes sold by JVC and used in Karaoke bars. JVC expected to sell $1 billion worth of the jukeboxes annually. Around this time co-founder Edward Sun left the company to start a business in Taiwan that would build Karaoke machines using C-Cube chips.

In fall 1993 C-Cube introduced the first real-time MPEG-1 video encoder. The CL4000 graphics coprocessor was capable of performing real-time video encoding or decoding and was compatible with both MPEG and JPEG standards. The chip’s high level of integration was expected to reduce the price of multimedia authoring systems to less than $4,000 within two years. The coprocessor contained 1.2 million transistors, giving it the power to perform real-time MPEG encoding or decoding. Multiple CL4000s could be employed together to encode larger, high-resolution images.

For 1993 C-Cube reported an 80 percent increase in revenues to $24 million. The company was clearly the leader in the video compression market. Its customers included Thomson Consumer Electronics, Scientifica Atlanta, Philips, and Compression Labs in the broadcast market. In the consumer electronics market its customers included JVC, Commodore, Goldstar, Samsung, and 3DO. The video compression market was expected to grow so rapidly that C-Cube predicted its revenue would double every year and that it would be able to spend 35 percent of its revenue on research and development. One key to C-Cube’s continued market dominance was its access to the wafer fabrication facilities of Texas Instruments and Advanced Micro Devices.

Company Perspectives:

C-Cube recognizes that it takes an industry to establish the critical infrastructure that enables digital video to penetrate applications worldwide. Through strategic relationships with content owners, hardware and software technology providers, systems manufacturers and standards bodies, C-Cube has brought the necessary industry players together to lay the foundation for the conversion of the home from analog to digital video.

1994–99: Going Public

In 1994 C-Cube reincorporated as a Delaware corporation. It made its initial public offering (IPO) of stock in April 1994, selling some 2.4 million shares at an initial price of $15 per share. Prior to the IPO the company had raised about $38 million from investors. Among the investors was venture capital firm Sequoia Capital, whose Don Valentine had become C-Cube’s chairman.

In April 1994 C-Cube announced it would introduce the first multimode video decoder chip for shipment later in the year. The CL9100, RISC-based integrated circuit (1C) could decode four video compression algorithms: MPEG-2 (both simple and main profile), DigiCipher II, and MPEG-1. It also supported all standards, including NTSC, PAL, and film, so that cable box manufacturers could use the single chip to implement the most widely accepted compression systems.

In fall 1994 C-Cube introduced a new chip, the CL480V/ CD, that was expected to reduce the price of video compact disc players from $400 to less than $250. The consumer electronics chip could also enable PC video CD add-in cards for less than $300. By 1995 some 22 consumer electronic companies were relying on C-Cube’s chips to build video CD players.

For the broadcast market, C-Cube introduced the CLM4700 family of real-time MPEG-2 encoders at the end of 1994. These devices would allow broadcasters to incorporate digital compression in their delivery, whether cable, telephone, or direct broadcast. MPEG-2 was now seen as the principal enabler for digital TV, and it was widely accepted as the industry standard.

In early 1995 C-Cube formed a new business unit to concentrate on growing the market for JPEG video compression de-vices. The firm noted that the MPEG market, in which it held a leadership position, was becoming more crowded with software-based solutions, chips from the Far East and Europe, and new competitors. Up to this time JPEG was being used primarily for high-end digital video editing, high-end copiers, Post-script printers, newspaper wirephoto transmission, medical im-aging, and security applications.

During the year C-Cube introduced a second-generation MPEG-2 CLM4400 encoder chip based on its VideoRISC architecture. The chip reduced the number of required encoding devices to four, which would enable customers to pack more data streams over existing bandwidth. The company also introduced a CLM4550 MPEG-1 encoder for real-time communications and authoring for games and entertainment. The firm’s new CL480PC System Decoder combined MPEG audio and video decoders on a single chip and integrated them with other logic circuits in a multimedia PC design, thus bringing MPEG decoding to laptop computers and multimedia desktop PCs.

Also in 1995 C-Cube entered the video telephony market by developing the CLM4200, a video encoder/decoder (codec). Its first customer for the chip was PictureTel, which planned to use the chip in a group video conferencing system currently under development. In August 1995 C-Cube’s stock rose ten percent in one day to around $44 a share, after the company announced it would sell video decoder chips to Sony Corp. and Sharp Electronics. C-Cube was supplying more than 20 consumer electronics companies with chips for use in a new generation of digital video machines. Utilizing C-Cube’s technology, up to 74 minutes of video data could be stored on one compact disk. So far, the biggest market for video compact disks was Asia, where the Karaoke craze was fueling demand.

For 1995, C-Cube’s stock rose 558 percent. For the first nine months of 1995 the company’s profits rose 437 percent to $16 million, while revenue jumped 140 percent to $74 million for nine months. Co-founder Alexandre Balkanski had become C-Cube’s CEO. By mid-1996 the stock was in the low $30s following a market correction that affected many technology stocks. Also in 1995 the company received an Emmy award for its MPEG-2 technology contribution to digital television.

In 1996 C-Cube faced challenges from IBM and LSI Logic to its dominance of the MPEG-2 video decoder market. Both companies introduced video codecs aimed at the broadcast market for real-time broadcast encoding. At the spring 1996 meeting of the National Association of Broadcasters (NAB) in Las Vegas, C-Cube introduced three chipsets. Its seven-chip CLM4740 MPEG-2 device targeted direct broadcast satellite, digital or wireless cable, and wide-screen enhanced definition television (EDTV) applications. Its two-chip CLM4440 video authoring device was the first MPEG-1 advanced videoCD de-coder to integrate NTCS and PAL standards. At least three OEMs planned to announce PC add-in boards for creating video content based on the CLM4440 multimedia authoring chipset at the NAB exhibition. A third new product, the CLM4720 storage encoder, was designed to format video for storage on video file servers for video-on-demand, local television advertising insertions, and broadcast automation applications.

In 1996 C-Cube acquired DiviCom Inc., in which C-Cube had taken a 5.4 percent ownership interest when it was founded in 1993. DiviCom manufactured integrated circuits for set-top boxes. As a subsidiary of C-Cube, it would become the leading provider of MPEG-2 encoding products and systems for digital video broadcasting. C-Cube’s semiconductor division would continue to supply digital video IC’s for both consumer electronics and communication products. For 1996 C-Cube reported revenues of $320 million, compared to $125 million in 1995.

C-Cube’s new low-cost MPEG-1 video decoder, the CLM4111, promised to bring true video processing to PCs. When added to a PC, the CLM4111 let users capture, edit, store, and communicate with digital video. PC users could thus create high-quality MPEG videos for presentations, training videos, and communications on the Internet.

Key Dates:

1988:: C-Cube Microsystems, Inc. is established as a California corporation.
1990:: The company ships its first product, a single-chip encoder/decoder for image compression.
1994:: C-Cube goes public.
1996:: C-Cube acquires DiviCom, a maker of integrated circuits for set-top boxes.
2000:: DiviCom merges with Harmonic, Inc.; C-Cube Microsystems continues as a semiconductor provider to the digital video market.

With digital videodiscs (DVDs) expected to hit U.S. and worldwide consumer markets in 1997, C-Cube introduced a new single-chip decoder for DVD video players and on-card solutions for PCs. It also introduced a process that enabled a 133-minute movie to be encoded in real-time on a single DVD. Later in the year the company introduced Secure View, a copy-protection chip designed to prevent unauthorized copying of movies that were recorded in the DVD format. SecureView was expected to lower the cost of DVD hardware for consumers and to encourage Hollywood studios to make more titles available in the DVD format. During the year C-Cube also introduced its ZiVA DVD decoder, which was considered the first MPEG-2 audio/video product to be recognized as Dolby Digital 6-Channel compliant.

In mid-1997 C-Cube introduced a new reference design that would support a new class of PC peripherals known as MVP, or MPEG video peripherals, for the consumer market. Peripheral manufacturers Avermedia and Videonics announced they would develop MVPs using C-Cube’s reference design. MVPs had the potential to bring high-quality still and full-motion video capture capabilities to a new audience of consumers. The MVPs were powered by C-Cube’s VideoRISC MPEG processor.

Later in 1997 C-Cube launched its DVx 1C, the first single-chip codec for MPEG-2. Up to this time MPEG-2 codecs had relied on three to 12 ICs. The new chip was expected to reduce the costs of video editing and production and allow consumers to do MPEG-based video editing on PCs equipped with a recordable digital versatile disc (DVD) drive. Among the first customers for the DVx codec were JVC, DiviCom, Optibase, Vela Research, Comsat Laboratories, and Optivision.

C-Cube followed up in 1998 with its DVxpress series, a family of MPEG-2 encoder/decoder (codec) products targeted at digital broadcast, professional studio, post production, and content authoring applications. The MPEG-2 editing environment was considered compatible with most digital editing technologies. In the fall C-Cube introduced DVxpress-MX, a codec that allowed studio and broadcast production and editing users to have all-digital video production. For the first time, MPEG and digital video could co-exist in the same environment and be used together.

Later in the year C-Cube entered into an alliance designed to provide cable TV operators with an interoperable digital system. The four firms involved in the strategic alliance were C-Cube and its subsidiary DiviCom, along with Japan’s Pioneer Electronics and Europe’s Canal+. The alliance with Canal + was considered something of a surprise, because its biggest silicon supplier for set-top boxes was C-Cube’s biggest rival, STMicroelectronics. In Europe, Canal + had about 1.8 million set-top boxes installed for interactive television applications such as Web browsing and home shopping.

For 1998 C-Cube reported revenues of $351.8 million and net income of $46.3 million, compared to 1997 revenues of $337 million and net income of $44.3 million.

In January 1999 C-Cube acquired the communication technology, patents, and personnel of TV/COM International, which was part of the Mindport Group Inc. of San Diego. The acquisition gave C-Cube strategic communication technologies for inter-active cable and satellite digital set-top boxes. The next month C-Cube won a contract from Canal + to supply it with set-top box digital video chipsets. Canal + was one of Europe’s largest digital pay-TV services. C-Cube subsequently announced it would also supply set-top box chipsets for Germany’s KirchGroup for use on German Pay TV. During the year C-Cube continued to actively pursue the European set-top box market. In fall 1999 C-Cube introduced an improved high-definition chip for video production and broadcast called the DVxHD.

Divestiture and Spin-Off: 2000

Until May 2, 2000, C-Cube consisted of two divisions, C-Cube Semiconductor and DiviCom. At the close of business on May 2, the semiconductor division was spun off as a stand-alone entity with the temporary name of C-Cube Semiconductor Inc. The next day, the remainder of C-Cube Microsystems— essentially DiviCom—was merged into Harmonic, Inc., a Sunnyvale, California-based maker of digital fiber-optic systems. The acquisition of DiviCom by Harmonic was valued at $1.7 billion. Following the merger, C-Cube Semiconductor Inc. re-acquired the name C-Cube Microsystems, Inc. Umesh Padval, who had been president of C-Cube Semiconductor since 1998, became president and CEO of C-Cube Microsystems.

With the sale of DiviCom, which provided open solutions for digital television and was C-Cube’s systems integration business, C-Cube Microsytems became a pure semiconductor company with a strong presence in the digital video market. C-Cube expected to build on its strength of designing and manufacturing silicon solutions for DVD and digital VHS players, personal video recorders, digital set-top boxes, video production equipment, and television broadcasting systems.

C-Cube was enjoying explosive growth in its DVD chipsets. In September 2000 it announced it was the first chip supplier to surpass the ten million unit mark in silicon shipments for the worldwide DVD market. The DVD market began in 1997, and in 1999 C-Cube shipped nearly four million DVD chips, more than all DVD industry shipments in 1998. For 1999 the company claimed about 30 percent market share and was named the world’s top supplier of DVD silicon.