When Nvidia Corp. put the final nail in 3Dfx Interactive Inc.'s coffin with last month's buyout offer, the company took a big step toward securing its position as a top-tier graphics-chip manufacturer.
But as history has shown all too often in the fickle PC-graphics sector, this year's star can easily become next year's market casualty. Survival in the graphics-chip business favors companies that can accommodate the market's demand for state-of-the-art designs while keeping their latest and sexiest launches in sync with customer delivery dates.
According to market research firm Jon Peddie Associates, Mill Valley, Calif., there were 45 graphics-controller vendors in the market five years ago. Today there are no more than 12.
"We've seen a reduction in the population of graphics-chip suppliers while at the same time the market has expanded," analyst Jon Peddie said. "As a result, some companies have become very strong, such as ATI [Technologies Inc.] and Nvidia."
In addition to 3Dfx, whose Voodoo accelerator was the gold standard for PC-graphics performance just two years ago, market consolidation has claimed a raft of high fliers. One-time market leader S3 Inc. sold its 3D-graphics IC business to Via Technologies Inc. NeoMagic Corp. exited the 3D-graphics laptop segment and is designing an integrated MIPS-based multimedia device aimed at mobile Internet appliances. Even mighty Intel Corp. has found the graphics sector painful and has done little to enhance its aging 752 graphics core.
Late in 1999, 3Dfx was generating a buzz with its newest creation, the high-performance Napalm chip. Unveiled at Fall Comdex that year, the Napalm's 14-million-transistor design was touted as serving "next-generation" graphics applications. But a production hiccup forced the company to miss its Christmas 2000 ship date, putting it in a tailspin from which it never recovered.
Stepping in last month with a bid to boost its intellectual-property stockpile, Nvidia said it would acquire the graphics-chip inventory, patents, and other IP of San Jose-based 3Dfx for $70 million in cash and 1 million shares of stock. The purchase capped off a stellar year for the company, which posted earnings of $68.9 million for the first nine months of 2000-up from $23.5 million in the same period a year ago-and landed a potentially lucrative design win in Microsoft Corp.'s X-Box game console.
But even Nvidia will be hard pressed to supply the X-Box with its leading-edge chips, according to Richard Doherty, an analyst at Envisioneering Group, a Seaford, N.Y., research firm. Doherty said the Santa Clara, Calif., designer may initially need to resort to older NV10 and NV15 media processors when the X-Box is introduced later this year, until its new, higher-performance NV25 devices are available.
"While the NV10 or the NV15 will still probably make the X-Box as powerful in an X86-friendly environment as any other chip around and will put the X-Box ahead of the Playstation, these chips had always been thought of as a safety net," Doherty said. "They represented the X-Box developer's safety net but not its goal, which, of course, is to execute on time and to get their chips to work perfectly the first time around."
Without specifying the processor to be used in the X-Box, an Nvidia spokesman denied there was a problem with the company's development timetable. "The X-Box will be based on the Nvidia chip architecture that'll be introduced during the first half of this year," he said. "Nothing has changed. Everything's on schedule."
Despite the graphics market's latest shake-up, the industry is in a period of relative prosperity, according to analysts, and the existing supplier base should remain intact at least for the next six months.
"Nothing's going away. The market's still growing, and the graphics-controller business is quite healthy," Peddie said. "What we're seeing with 3Dfx is a churn in the market as the company exits. On the horizon we'll see companies entering the market to fill that space."
While Peddie contended there is room for new players to assume the spot vacated by 3Dfx, Doherty said a replacement was unlikely to surface.
Consider "how long it'll take for a developer to get up to speed on a 3Dfx feature and compete with an ATI or a Nvidia," he said. "I don't think there's room for another 3Dfx to suddenly pop up."