Where ITEL treads, the earth shakes....................
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INTEL TRANSFORMS INTO GRAPHICS MARKET PLAYER WITH CHIPS AND TECHNOLOGY ACQUISITION: LEADS NOTEBOOK CONTROLLER MARKET
Intel Corp.'s [INTC] impending acquisition of Chips and Technologies Inc. [CHPS] for $420 million is proof that the CPU stronghold is determined to bring the PC's graphics subsystem under its thumb no matter what the cost
The purchase guarantees Intel the graphics know-how it has been unable to cultivate in house and sends a not-so-subtle ripple of fear through the graphics chip market.
"Intel, come hell or high water, wants to be a significant player in graphics," said Mike Feibus, an analyst with Mercury Research. "The best and most expedient way is to suck up a company that has the expertise."
Intel was already familiar with Chips with Technologies through its work on the Auburn project-a graphics accelerator developed by Intel and Lockheed Martin Corp.'s [LMT] Real 3D subsidiary. Chips provided the 2-D component of Auburn, the graphics chip expected to ship in early 1998.
Intel has been unusually quiet about Auburn developments. Some insiders suspect it won't be the graphics breakthrough the company was hoping for. But with Chips and Technologies in tow, the Intel machine has a secondary inroad to the graphics world, even if Auburn falls short.
"If they miss this generation, they'll try next time," Feibus said.
As well as technical expertise, the deal gives Intel insight into graphics customers - knowledge that will help with the deployment of Auburn and other future products.
Analysts agreed that the acquisition is only coincidental with the roll out of the Accelerated Graphics Port (AGP), but it does give Intel knowledge of the graphics controller side to go along with its core logic business.
Notebook Outlook
The acquisition makes Intel the No. 1 supplier of graphics accelerators to the notebook market because Chips and Technologies commands 49 percent of that market, according to In-Stat's first quarter data.
That's bad news for ATI Technologies Inc. and S3 In. [SIII], leaders in the desktop graphics market looking to sustain growth by entering the notebook controller business. (see MMW, April 14, p. 7) For S3, which reported $109 million in revenue for the most recent quarter - only a 5 percent increase compared to the double-digit growth the company experienced for most of last year - Intel is a major roadblock to achieving those earlier gains.
"[S3] climbed to a position of strength but they can't grow much faster without growing into new markets," said Mark Kirstein, an analyst with In-Stat. "They're going to have a very hard time."
"S3 is dying right now," said Richard Chang an analyst with Bear Stearns, adding that the Chips and Technologies acquisition is "a bad deal for everyone else in the graphics business."
Impact on ATI
For ATI, which is making a business out of add-in cards as well as chips, the Intel deal comes when the company is still in a strong position in the graphics market. Leveraging chip and board-level expertise, ATI reported a sales increase of 17 percent for the quarter ending May 31, 1997. In addition to $135.1 million in sales for the period, the company saw a gross margin of 33.7 percent, up from 27.4 percent in the same quarter a year earlier.
Kirstein said ATI, compared with S3, is "farther out on Intel's radar screen."
Mercury Research's Feibus doesn't think the Intel acquisition will have an impact on notebook chip vendors before next year.
"Notebooks have a longer design cycle [than desktops]," he said.
The acquisition will make Chips and Technologies a wholly owned Intel subsidiary. Jim Stafford, Chips president and CEO, will join Intel as vice president of the desktop products group. (Intel, 408/765-8080; Chips and Technologies, 408/434-0600.)
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