In 1999, Gordon Campbell, a venture capitalist with a wealth of experience in the chip industry, came to one of Silicon Valley's long-established powerhouses, National Semiconductor, with a suggestion: The company should make a chip targeting the MP3 player market.

The idea was slightly ahead of its time -- Napster had yet to break big and the music industry still hadn't given up its efforts to sue the first entry in the MP3 player field, the Diamond Rio, out of business. National Semiconductor said no thanks.

But according to one published report, National's chief technology officer, John Mallard, followed Campbell out into the parking lot. Soon enough, in time-honored Valley fashion, six National execs jumped ship and formed PortalPlayer. Right into the teeth of the great tech bubble blowout.

Michael Maia, V.P. of marketing for PortalPlayer, laughs out loud when the parking lot story is mentioned, but neither confirms nor denies it. He agrees, though, that starting a new company in late 1999, just before the bottom dropped out of the tech economy, "was an interesting time to be building a business."

So interesting, in fact, that success demanded innovative thinking, not just in chip design, but in business model. On the manufacturing side, PortalPlayer would follow a path well-worn in the Valley for at least a decade or more. It would be a "fabless" design house -- so-called because PortalPlayer would not fabricate its own chips. That job would be outsourced to Taiwan. But PortalPlayer added a tweak: The chip's design, an immensely complex and labor-intensive undertaking involving both hardware layout and software coding, would be split between the U.S. and a fully owned subsidiary in Hyderabad, India.

"From the very beginning, we said we are going to set up a good-sized Indian facility, because the breadth of available resources coming out of India in the software area is huge," says Maia. Three of PortalPlayer's original six founders are of Indian descent.

It's part of the logic of market capitalism that political or national loyalties make little sense in individual companies' Darwinian struggle to make a buck. In Silicon Valley, prospective start-ups that don't include an Indian component in their business plan will get the cold shoulder from venture capitalists. Are you asking not to be taken seriously?

Today, PortalPlayer employs some 194 people. About half of those are in Hyderabad. Another 50 or so are now in San Jose (the company moved its headquarters from Santa Clara in May). Around 30 are in Kirkland, Wash., about 15 minutes from Microsoft and RealNetworks, two central players in the music delivery business.

There are several advantages to this setup. The first is overhead. Indian engineers are cheaper than American engineers but capable of working at just as high a level. What's more, in the ultra-competitive world of both chip design and consumer electronics, the pressure of the business cycle is remorseless. Being late to market with a new version of your product can spell doom. Any number of companies in the Valley, the U.S. or, increasingly, abroad would love Apple's business. (Indeed, the iPod Shuffle, which uses Flash memory instead of a hard drive, runs on a chip from a competing company.) All they need is a slight edge, in price, in power, in features, to make their move.

The competitive pressure has forced PortalPlayer, like many of its colleagues, to work on a 24-hour development cycle. Each morning and evening, PortalPlayer's U.S. developers meet online with their Indian counterparts. Either side can then hand off work-in-progress to the other, check the other's work for errors, or proceed collaboratively. From Hyderabad to Santa Clara, the sun never sets on PortalPlayer.

Success did not come immediately. At one point, the plan was to make a CD recorder; at another, PortalPlayer execs prepared to get into the music delivery business. But in the summer of 2001, PortalPlayer's chip, which reportedly delivered better-sounding music and offered more flexibility than the offerings from nine other competitors, landed the Apple contract. "I'm quite impressed with PortalPlayer," says Shyam Nagrani, an analyst at iSuppli, a firm that tracks developments in the semiconductor industry. "Their products are obviously very good." Ever since, the company's fortunes have followed the iPod. (PortalPlayer refuses to comment on any aspect of its relationship with Apple, and Apple, as a general rule, does not comment on its suppliers.)

Still, even after Apple's blessing, PortalPlayer's road was a little rocky. Mallard left in December 2002 ("to pursue other interests" says Maia), and there were layoffs in early 2003. But the company went public in November 2004, has recorded two consecutive profitable quarters, and total iPod sales are expected to reach 35 million units by the end of 2006.

"Getting to that first million [dollars of revenue] was tough," says Maia, "but each subsequent million is happening at a faster rate."

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