Some second-tier PC add-on card vendors are predicting that last month's sale of STB Systems Inc. will lead to a shakeout among smaller card suppliers, if not to the demise of the independent graphics-card market itself.
In buying Richardson, Texas-based STB for an estimated $141 million stock swap, chip maker 3Dfx Interactive Inc. is gaining the two most popular means of distributing individual graphics ICs: add-on cards and motherboards.
The move puts increasing pressure on card companies, whose days as distributors of PC components seem numbered, according to observers. On the same day the acquisition was disclosed, STB reported a fiscal fourth-quarter loss of $5.9 million on sales of $54.9 million.
At the time, one analyst said privately: "I'm not going to name names, but some of the smaller companies-you know who they are-are toast."
Executives at 3Dfx, Santa Clara, Calif., said they will continue to support existing customers-and will even expand a relationship with Santa Clara-based workstation-card maker Quantum3D Inc.-but likely will halt sales to STB competitors once the 3Dfx Voodoo3 chip is launched in early 1999.
The upshot? "There is definitely going to be a consolidation," said Jim Anderson, vice president of marketing and sales at Canopus Corp., a card maker located in San Jose. "A lot of the smaller guys are going to be hurt. We've gone from a couple hundred [card companies] down to about a dozen, and a reduction to three or five is coming up."
Speaking on condition of anonymity, a senior executive for a company that makes add-on cards for the Apple Macintosh said his company tried to expand into the PC space, but abandoned its efforts this fall. "It ultimately just wasn't profitable," he said. "[There are] just too many players."
Add-on card vendors are being squeezed by a combination of industry economics and a trend toward integration, which is pulling a growing number of peripheral components and interfaces on-chip. And because graphics ICs now represent a greater portion of the value of an add-on card, graphics-IC vendors are gaining clout at the expense of card suppliers.
"All the technology is now in the chip," Anderson said.
Besides the fact that their products are continuously being replaced by newer, upgraded devices, the sheer number of add-on card vendors is making it increasingly difficult for companies to differentiate themselves. (3Dfx alone sells chips to nearly 30 customers.) In such a market, pricing becomes the chief competitive weapon.
For example, add-on cards based on 3Dfx's Voodoo Banshee 2D/3D graphics chip debuted in June at $150, but a month later had fallen to just $89 as a raft of competitors weighed in.
Exacerbating the overcrowded market scenario for smaller suppliers is the fact that large card companies often receive higher-volume discounts, and have the resources to write proprietary driver software and market the cards widely. But even the card makers with their own drivers are often bested by chip suppliers with superior software.
"The role of the chip vendor is to provide a stable platform ... which we then optimize," said Michael Viramontes, senior product marketing manager at ELSA Inc., a Santa Clara, Calif., subsidiary of German card maker ELSA AG. "That will only stop when [graphics chips] produce the quality of HDTV or real life."
Analysts disagreed. "How do you get differentiation? These days, it's vertical integration and pricing," said Bob McQuillan of Jon Peddie Associates, Tiburon, Calif.
While companies such as STB have pursued the acquisition path, other card companies are evaluating their options. Some, like Canopus, are reacting by seeking new markets, such as PC video-editing products. Others, like ELSA, maintain a worldwide market presence that helps insulate them from regional pressures.
"Consolidation is the million-dollar question right now," said Joe Lau, marketing coordinator with Fremont, Calif.-based Hercules Computer Technology Inc., which called off a merger with ELSA AG in November after the companies failed to agree on terms. "We're just keeping all avenues open right now."