Aureal tanks

— 1:10 AM on March 27, 2000

Following on the recent announcement of its dismal quarterly results, Aureal issued the following press release late Friday, well after the market's close:

FREMONT, Calif., March 24 /PRNewswire/ -- Aureal Inc. (OTC Bulletin Board: AURL - news), a leader in digital audio imaging, today announced the resignation of all of its executive officers, including its President and CEO, Kip Kokinakis, its Chief Technical Officer, Scott Foster, its Chief Financial Officer, David Domeier, and its Chief Operating Officer and General Counsel, Brendan O'Flaherty, along with all senior staff members of Aureal. The Board of Aureal stated that it is seeking replacement or turnaround management and is considering all necessary actions to either sell the Company or its assets or wind down the Company.
That's pretty much it. Aureal's quarterly results announcement included a notice that the company was seeking funding, and now it appears their principal investors decided to pull the plug.

Sadly, Aureal's collapse seems to have been hastened by the expense of their patent fight with Creative—a court battle which Aureal won. I haven't followed this whole episode closely enough to pass judgment, but it sure looks like patent litigation was once again used as a weapon by a big company against a little one; even though the smaller company was able to win the court case, the legal fight took its toll. Read this from Aureal's financial annoucement:

``Unfortunately, even when you're right and you win in court, it can have a huge impact on your business,'' said David Domeier, Senior VP Finance and CFO of Aureal. ``We can't measure the impact of the trial process and attendant market disruption on our sales for the quarter or the year, but we know the customers were confused by what was going on. We lost sales and incurred substantial costs in preparing for and fighting the case in court.''
The shame of it all is that Aureal really did have the best 3D sound technology in the Vortex line and A3D. Often called the "3dfx of audio," Aureal pioneered true 3D positional audio on the PC. The A3D API was considered the audio world's Glide, proprietary but indispensable. And, like 3dfx, Aureal not long ago moved toward vertical integration, making their own, branded sound cards for retail sale.

Perhaps because they lived off the fat of a hardware-based monopoly for so long without innovating much, I've never really liked Creative. (Well, the many hours I spent fighting their Windows NT drivers may have had something to do with it.) When I upgraded from a SoundBlaster 32 to a Vortex card, it was a revelation; the signal-to-noise ratio on the Creative was horrendous, but the Vortex was crystal clear. Now that hardware abstraction and APIs like DirectSound have made the original SoundBlaster hardware truly dispensable, I was hoping to see innovators like Aureal flourish. There may be hope yet if someone picks up what's left of the company and makes a go of it, but this is a dark moment.

Another possbile lesson from this one: vertical integration ain't all it's cracked up to be. From the days when Jack Tramiel was gutting Atari to today, tech industry analysts have been sweet on vertically integrated companies. During that time, however, we've seen a number of successful companies wrecked by attempts to integrate vertically. Aureal is no exception; by choosing to manufacture their own cards (a la 3dfx and Creative) instead of selling their chips/designs to other companies (a la NVIDIA and the 3dfx of old), Aureal managed to start competing with their best customers, including Diamond/S3, overnight.

No wonder the cash stopped flowing.

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