Reading The Tea Leaves

Which leads me to believe that in the next nine months we should see some dramatic changes at Diamond. The changes might come as a result of something Creative does. Will Creative tie up either Nvidia or S3, and reduce the number of suppliers of graphics chips to Diamond by yet another company? Maybe. Will Creative aggressively set out to beat up on anyone, starting with Diamond, which wants to make digital audio products for the PC market? You bet! Whatever Creative does for its own good, will also make Diamond react to make its business better.

Also, both Diamond and Creative stand to gain some ground in the PC OEM market with STB out of the picture. These two companies are big enough to put big resources into supplying the tier one PC OEMs. Diamond's TNT boards are already nicely positioned in Dell's product lines. Creative, on the other hand, knows from its audio business that add-in board markets are shrinking, and that its PC OEM partners are its best hope of growth across all its product lines.

Still, it's hard to imagine that Diamond or Creative will go the complete vertically integrated way in the graphics business., and it's hard to imagine they won't They might be forced into making a tough decision, if the only competition out there is no-name brands from Asia riding on the back on S3 or Nvidia. After all, who wants to compete on price alone? Both companies have felt the margin pressures in their respective graphics board businesses. On the other hand, the future leader in the graphics chip market has yet to be anointed. Graphics market leadership is a game of leapfrog, as you may well know. Today its 3dfx, and tomorrow its Nvidia, but any bet on graphics technology made by either Diamond or Creative has to pay back beyond the existing generation of market leaders. There are other names out there. VideoLogic, GigaPixel, and Stellar Semiconductor come to mind. I wouldn't want to be the guy picking a future winner in 3D. All I know is that there will be faster chips, better 3D, and new companies to take a shot at the top spot.

In the meantime, for the next eighteen months, Diamond and Creative will concentrate on picking up the business STB has given up. They will try and drive Nvidia ahead of 3dfx in the retail sector of the market, and fight off ATI and Matrox with S3. Diamond will try and diversify its product line with home networking, and the successors to Rio. Creative will try and squeeze better margins out of its graphics business, and capitalize on Internet music opportunities. And then? There'll still be just five brands to contend with in the graphics market: ATI, 3dfx/STB, Matrox, Creative, and Diamond. Expect memory loads to go to 16 and 32 MBytes for the upgrade market of add-in boards; expect prices to stabilize in the hundred dollar ranges for these boards, and not to exceed one hundred and fifty dollars, and expect Creative and Diamond to target ATI, 3dfx/STB, and Matrox with almost identical graphics board offerings. Nothing ever changes.

Nice to know the add-in graphics board business isn't going to die anytime soon, but you have to admit that everyone is looking pretty much the same. For Diamond and Creative, it's all a matter of execution, channel management and marketing. If they stick to what they do best, there may be better profits ahead for their graphics businesses. Otherwise, by the first quarter of 2000, we may lose one more graphics brand to merger, acquisition, or divestiture. It could be sooner than that.

I'll continue to put up some data on the graphics company's that I review at www.smokezine.com , for those people who want to explore their financial and business performance in more detail.