By Dan Bloom

June 9, 2006

Beleaguered chip-maker PortalPlayer (Nasdaq: PLAY) announced plans June 8 to cut its workforce by 45 employees. The 14% cut, which should save $6 million-$7 million per year, was made to reduce costs in the wake of Apple`s (Nasdaq: AAPL) decision to forgo using PortalPlayer`s audio chip in the iPod nano.

Apple represented more than 90% of PortalPlayer`s business in 2005. As a result, PortalPlayer serves as an unfortunate example of the risk posed by relying on one customer for a large percentage of sales -- as this chart of its 50% price drop shows. Unfortunately, Apple may stiff-arm the reeling company again. While PortalPlayer`s chips are used in the current video-enabled iPod, it`s possible that the next version of the device will include someone else`s chips.

Nevertheless, there are still some hopeful, if speculative, signs for PortalPlayer. One reason for optimism centers around a feature called Sideshow that Microsoft (Nasdaq: MSFT) is including in its upcoming Vista operating system. Sideshow enables laptop designers to include a small external display that can be used to access information without having to power up the laptop. The displays will have their own memory and batteries to avoid draining the main laptop battery. Sideshow will make it easy for notebook users to quickly access email, notes, or a calendar, as well as playing music or videos.

PortalPlayer is making a line of chips called Preface that will power the screens needed for Sideshow. Besides the aforementioned features, Preface will also let users control applications when the laptop is running, saving battery power by avoiding use of the main screen. PortalPlayer appears to have a head start over other chip makers, since it has been working closely with both Microsoft and laptop manufacturers to develop the technology.

However, continued delays in Vista could hurt PortalPlayer here, since plenty of other companies would love to see their chips provide the functionality for Sideshow. Nevertheless, a move into this part of the market seems to make good sense for PortalPlayer, since the laptop market is much more fragmented than the Apple-dominated digital-music-player market.