Shaking The Money Tree

3dfx and Nvidia. It seems that these two companies are the front-runners in the thoroughbred class of graphics, and it also seems that their business practices over the course of the coming year will be more of a differentiation factor than, whether one is the benchmark leader in games, or not. I have to be honest and say, I don't really care about the one or two frame differences in performance you see, here and there. I am intrigued by the way these two companies go about their business. I'll start with 3dfx because, as a result of its merger with STB it will face the greatest hurdles to its success. However, I also believe that Nvidia will have to face exactly the same obstacles if, as I believe, it too has to become both chip and board vendor before the year is out. More on the reasons for that later.

The first problem facing 3dfx and STB is revenue, and profits. In 3dfx's case, the company derived $117.5 million of its revenues in 1998 from Diamond and Creative. That's roughly 58 per cent of its business. In STB's case, the company derived close to 64 per cent of its revenues, $170.1 million, from the sale of Nvidia based products. In March, 1999 Diamond wasn't going to pay 3dfx $3.9 million claiming that 3dfx owed it money for faulty and returned products. The cost of the merger between 3dfx and STB is officially put at about $4.5 million, but will probably come in higher than that. STB was getting 75 per cent of its revenues from the sales of boards to OEMs Dell, Compaq, and Gateway. Furthermore, also in March, 1999 3dfx faced two patent infringement actions, one from Real 3D, both of which the company is vigorously defending, but both of which have brought bigger fish to their knees. In Real 3D's case, the Lockheed Martin company has abandoned the PC graphics board business in favor of pursuing its intellectual property rights, which translates into basically taking to court almost all of the 3D graphic chip guys out there, if Real 3D even gets a whiff of a patent infringement. Bear in mind that Real 3D convinced both Intel and SGI that it had a case to make, or that it was better to avoid nasty lawsuits with it. No one can predict the outcome in this case, but Real 3D just adds some more pressure to an already stressful situation as 3Dfx and STB merge.

Nvidia, were it to go down the graphics board route, would face almost all of the same hurdles. Whether Nvidia bought into a board company, as 3dfx did, or went its own way, the costs would add up, and the pressures in the OEM and retail channels would be the same. Ironically, Nvidia also has a bunch of litigants pursuing it, namely 3dfx, SGI, and S3. They also have to find a means of converting PC OEMs to a new board supplier from ground zero, now that STB has stepped away. This is harder than it may appear at first because, neither Diamond, Creative, or a host of lesser board companies, have the PC OEM strengths of STB. If Nvidia does all the work to make the PC OEMs happy then, why not just make the damn boards? Well, Nvidia hasn't yet found its brand identity or retail niche, as has 3dfx. In fact, Nvidia would rather not play the same game as 3dfx. It would rather be beating down ATI, Matrox, and even S3. 3dfx is more of an irritation to its ambitions. Or so the company says. But, it's still a big problem, and losing a major revenue stream, in STB, did sting Nvidia. They'll become a board vendor sooner or later. All a matter of time. Oh, yeah. They would face the same problems as 3dfx does now. I said that, didn't I?

So? Every business has its problems. True, but the specter of Intel looms over these two, much in the same way as the specter of Intel's Intel740 graphics chip drove prices down in 1997 and 1998. Helping Intel to squeeze the graphics thoroughbreds is what used to be called the sub$1,000 PC market, and is now referred to as the sub-$800 and even sub-$600 PC business. In the retail channel the low cost PC business is accounting for 40 per cent of sales according to IDC Research. Intel's Celeron strategy, and its integration of graphics into core logic only helps to fuel this market where AMD and Cyrix pose some threat to the PC chip giant. What's it got to do with the thoroughbreds? Less money to go around at the high-end. More pressure from PC OEMs for solutions at lower price points.

Of course, it helps Nvidia and 3dfx to have the benchmark leaders in the 3D graphics business. It helps to make both their lower end offerings and PC OEM deals that much sweeter. For the PC OEMs they get the brand leader, and a justifiable premium is paid to the chip company. Yet, in the coming year, 3dfx has its work cut out getting those PC OEMs, starting from ground zero, despite the merger with STB. And all the time, STB has to get its Juarez, Mexico factories churning out as many boards as they have been used to in the past because, they are a fixed overhead. A significant one, and one that Diamond and Creative, for example, don't have. Man, that's pressure.

I'll deal with Diamond and Creative in future columns. They leave a lot to be desired in the graphics business, although I feel rather sorry for them, having been caught flat footed by the 3dfx and STB merger. As an aside, The Motley Fool, an investment Web site, has avidly followed, and touted 3dfx stock. It's interesting to that a recent article on the site about Diamond's recent financials basically tarred the company with the brush of being a bad manager of channel inventory. Of course, there is a lot of personal animosity, or so it seems, between Diamond and 3dfx management. I think partly due to a clash of egos at the top of both companies, both of which were angling for some sort of partnership, or merger before STB signed on the dotted line. I bring up this clash of personalities because, when I cover Diamond and Creative I have to get personal. Each graphics company is a reflection of the strong ego that helms it. As a result, the graphics business seems almost parochial at times. It might be useful to get some insight into the people who run the show because, if nothing else, they're an interesting bunch of folk, with their own foibles and hang ups, which just happen to impact your graphics pleasure. I am such a tease.