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

To: Simon Cardinale who wrote (5989)	8/4/1998 4:11:00 PM
From: David Blocher	Read Replies (1) \| Respond to of 16960

Actually, the stock acted fairly strong today considering the overall market was crushed. Hopefully $13.50 will be strong support for the intermediate term. Crossing my fingers...

To: Simon Cardinale who wrote (5989)	8/4/1998 5:32:00 PM
From: Patrick Grinsell	Read Replies (2) \| Respond to of 16960

Simon, I disagree... I was going to attack your arguments point by point but after Robert's comments, I'll stay "succinct". <<Basically they're doing so well under the current model (except for the stock price, but manufacturing boards wouldn't solve that) they shouldn't even consider changing unless their market dominance becomes overwhelming.>> The problem is they aren't doing the same thing anymore. They are going after the OEM market. In 1997 and the #1 and #2 OEM players were Matrox and ATI. Guess what their model is? In addition, low growth=low stock price. If a merger enables 3dfx to triple earnings this would be preferable to the flat 1999 that analysts currently forecast. The bottom line is greater earnings make for a higher stock price. Like a said, a merger with Quantum3d could enable them to sell OEMs and still sell retail to current IHV's. Quantum3d only uses 3dfx hardware anyway and the relationship is very close. This should enable them to make 3 or 4 times what they are currently making per OEM unit and make any price cutting much more palatable. I disagree with all your points but #1. Nothing personal, just my opinion. Pat P.S. Congrats to me and JEFF!!!! I noticed we don't have the "(trial member)" by our names anymore. WOOHOOO!! Thanks for helping me on-board guys.

To: Simon Cardinale who wrote (5989)	8/4/1998 10:52:00 PM
From: Joe C.	Respond to of 16960

Simon makes some excellent points about the advantages that the current model provides. This model has helped them to start from ground zero and their decision to not make their own boards early on has proven to be the correct one to date. TDFX was able to get their foot in the door from day one without having the retail channels, without spending dollars on marketing and advertising, and without incurring the costs of assembly and retail distribution. As a startup company, they did not have sufficient capital to do it right. The Diamonds and Creatives of the world did and they all benefitted. At some point, it may make a lot of sense for TDFX to expand into this business. However, I agree with Simon that now is not the time. STBI does look real cheap right now and its' hard to ignore the merits of such an acquisition. However, IMO TDFX would be making a mistake because they have yet to translate their current market dominance in the gaming world to the general audience user. TDFX needs to spend as much as they possibly can to expand their branding. Given the dynamic of the current market, pricing pressure will be huge in the low to mid end. The workstation market is also under a lot of pressure. TDFX owns it's market segment - high end consumer/gamer - and will do so for the foreseable future. This is a huge advantage for them in that they can enjoy large markups even though volumes are somewhat limited. Now is the time - this Christmas - for them to make a concerted push into the general audience market. We want all knowledgeable PC buyers (specifically non-gamers), to know and understand the value of 2D/3D graphics (most probably don't even know whether they have a card or a chip on the motherboard) and to associate quality with TDFX. If TDFX can create the perception (if not the reality) that they provide the best graphics solution available then they should be able to maintain slightly higher profit margins than its' competitors. Using their available cash for anything other than this in my mind would be a huge mistake. Let's not underestimate companies such as ATI because they ARE good at what they do. You may argue the technical merits but they DO have market share and they have been making money for some time now. This is the ultimate goal. Joe C. P.S. Welcome aboard Jeff and Patrick - keep up the good work.

To: Simon Cardinale who wrote (5989)	8/5/1998 12:26:00 AM
From: Patrick Grinsell	Read Replies (2) \| Respond to of 16960

Okay Simon, you asked for it... I'll argue for the STB acquisition, since nobody has responded to my Quantum3d suggestions. <<1) If one company's product is poor, another's might be better. People/reviewers will measure 3Dfx by the best of many board manufacturer's products.>> I agree. Jeff, not always will the reference design be the best answer. Take Metabyte, Quantum3d and Canopus as good examples. <<2) Board manufacturers won't slam 3Dfx too hard when they come out with a competitor (like TNT) because they know they'll be slitting their own throats down the line. This is especially important in 3Dfx's position, since they're the market leader and the target of most snipping (phrases like "Voodoo-killer" have entered the gaming industry's vocabulary, and may be around after the Voodoo line is gone.)>> I don't believe this has stopped any of the boardmakers from doing exactly that. Case in point: Diamond actually had the balls to say there was a flaw in the reference design of Voodoo2. Take a look at Diamond's TNT press release. It doesn't appear they are worried about Voodoo2 sales. <<3) 3Dfx only has a few customers, where board manufacturers have millions. Their marketing can be very targeted while board manufacturers take care of making the boxes pretty and getting the right shelf space at CompUSA.>> STB already has shelf space CompUSA and most of the same places Diamond does. 10 different brands of Voodoo2 on the same shelf calls for margin killing competition. 3dfx doing their own brand would be able to maintain higher margins for longer periods of time. Do you really believe that people are buying "diamond" and not "3dfx"? I don't buy that for a second. <<4) By binding their own success to the success of many other companies they increase the acceptance of their product in the computer industry.>> Hmmm...I guess you can say that 3dfx gets a few extra salesmen by going this route. No arguments here. <<5) They can piggie-back on the success of companies that have fans who don't know what chipset was in their last video card, but know it was a Diamond and that they liked it.>> I would argue, as before, that 3dfx is the overshadowing force and not diamond. If people are buying Voodoo2 it's because they the the best in 3d and know whatever 2d/3d card they currently have isn't cutting the mustard. By your argument they might end up with a stealth or velocity by mistake. No, I believe the people buying Voodoo2 know why they are buying and it isn't because of Diamond. They may, however, choose Diamond as their Voodoo2 of choice because they are familiar with them. <<6) They benefit from the experimentation of companies (like Wicked3D bundling with H3D glasses) without suffering from the failures. More experimentation means faster evolution.>> This is really the same argument as #1. I agree. <<7) Shelf space, shelf space, shelf space. CompUSA gives space to an armada of Voodoo2 boards which it wouldn't give to any one board manufacturer without serious price concessions.>> Profits, profits, profits. The bottom line is how much 3dfx can make. By my estimates, Diamond alone grossed 50M (40% margin on 125M revenue) from Voodoo2 boards last quarter (ended June 30). Had STB been a sole source distributor with the same gross from Voodoo2 as Diamond they would have made after-tax (35% rate) net income of a little over 26 million dollars. (Just plug in the fixed costs.) If 3dfx owned STBI as a wholly owned subsidiary this would equate to $1.61 per share last quarter (quarter ended April 30). Know the disgusting part? This assumes that 3dfx makes absolutely nothing on the actual chipset and that 3dfx's whole market-share is only as big as Diamond's customers and that there are no actual cost reductions in the combined company as a whole. I don't want the merger because it's cool. I want it because it makes economic sense. Oh yeah. In answer to the shelfs. Answer me this: Is there a place you can by a Voodoo2 at retail that you could not get an ATI card? See my point? Initial sales might hurt but the long term potential is there to have just as much market presence. <<8) They have better uses for their cash than buying STB.>> See above. At a minimum of $1.61 per share last quarter it seems like a pretty good use to me. Hell, the actual numbers would be closer to what they are expecting for ALL next year. <<9) They have better uses for their time. Buying a company would be distracting at a time when they need to be focused on keeping ahead of their competitors.>> As a shareholder, making money should be their #1 priority. This isn't a whim. There are serious economic benefits to be had. To be perfectly honest, I believe it is impossible to be on top of the technology curve 100% of the time. Not that I want them to ignore technology, but ATI didn't get where they are by having the latest technology. They got were they are because of business smarts. Leading technology is icing on the cake. If 3dfx were to stay focused on the high-end gamer I would agree with you here, but different markets require different strategies. <<10) System OEMs like Compaq will be more comfortable buying boards from one of many suppliers. They'll feel they have control since they could always drop one board producer and change to another. Meanwhile 3Dfx can sit back and relax, not caring who sells.>> Truly, this doesn't make sense. If this were true the #1, and #2 OEM would not be ATI and Matrox. It would appear that OEMs could care less who the boardmaker is. Pat P.S. I'm truly baffled that I'm the only one that sees an economic benefit here. I am not arrogant enough to think that I'm right and the world is wrong so maybe I should do a full detail what-if analysis on an actual merger with STBI or maybe Quantum3d. Better yet, somebody else to it and show me what a waste it would be. If you guys are interested I can go the full 100 yards and put it up on my web page.