Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : 3DFX -- Ignore unavailable to you. Want to Upgrade?

To: Patrick Grinsell who wrote (13606)	7/2/1999 7:37:00 PM
From: Patrick Grinsell	Read Replies (5) \| Respond to of 16960

Why am I invested in 3dfx? I've been asked this quite a few times lately, and considering what's going on with the stock price, it's a legitimate question. Clearly I foresee the stock price increasing sometime in the future. I think the best way to look at the industry is to examine the wreckage from the past few years. Let's first take a look at S3. Two or three years ago S3 had a near lockhold on the entire market. If memory serves, at one point they had around 90% of the total volume. How did they get there? Performance. They had the best winbench numbers by far. You'll remember the product as the Diamond Stealth product line, as chipset branding wasn't very prominent at the time. The 3d capabilities were nill, but then, 3d hadn't standardized yet. So what killed S3? I consider it a matter of three things. First and foremost, S3 was slow to catch on to the AGP bandwagon. When the new LX chipset came out sporting AGP, all the oems wanted AGP products. Second, 3d was coming to the forefront and S3's performance was horrible. Third S3's lack of vertical integration kept them down so that they couldn't get back into the game. When the Savage3 product came out, most boardmakers ignored it. It simply wasn't worth their energy. All the while, S3 was spending millions on R&D that their revenues really couldn't support. ATI stepped up to the plate with everything S3 didn't have. ATI had both decent 3d benchmarks and AGP. As volume levels increased, ATI's vertical integration allowed them to do something that others couldn't...lower prices. ATI has now reached a production level that makes it just about impossible for their non-vertically integrated competitors to compete just on price. It's worth noting that ATI has never had the technology lead. The only thing ATI has to worry about now is Intel doing to them what they did to S3. So what does this little history lesson show us in terms of where 3dfx should be situated to be a player? 1) 3dfx needs to make sure they are in touch with the market's overall direction and position themselves there. 2) Vertical integration is the key to control over your product and the ability to offer your product at competitive prices. 3) Mistakes in execution can cause you to lose a large chunck of your marketshare in a short period of time. Now let me address these one by one for 3dfx. 1) 3dfx knows that future advances in 3d technology will create a fractured market. Until now everyone has been heading in the same direction, but that will soon change. To ensure that they are heading in the right direction, they are working with developers to support their latest 3d technology. This has always been a strength for 3dfx and I don't doubt their ability to get rapid adoption of their newer technologies. It also makes me a little more comfortable that 3dfx will not try to reinvent the 3d wheel. The majority of their technology will be centered around the current standards with the additional technologies added in. 2) 3dfx has purchased the best independent boardmaker out there...and they got it for a steal. STB's business model and OEM relationships are the envy of the industry. 3) 3dfx's branding strategy is something that is unique to the industry. I'm going to let you in on a little secret. I think Voodoo3 is a huge mistake in execution. There are simply too many features missing from the product. The amazing part is that customers don't seem to care. Clearly, their branding strategy is pulling them through these rough spots. Were situation reversed and NVIDIA had a product with Voodoo3's specs, I doubt they could even find a boardmaker to produce the product. 3dfx's only kink in their chainmail could be their execution (#3) regardless of branding. Branding can only take you so far, and 3dfx has yet to show that they can do something beyond the Voodoo architecture. Of course, I'm betting they can do it, but I acknowledge that this is the riskiest part of owning 3dfx. You may be wondering why I haven't put down technology leader as one of my requirements for being a success. First of all, the market has shown you don't need be technology leader to be a success. (I site Voodoo3 and ATI as examples.) Second of all, keeping the technology lead over the long term is almost impossible. NVIDIA is heading down a slippery slope. One day their technology won't be the best and they will suddenly find themselves without the branding or the R&D money to support their business. Pat