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

To: Marc who wrote (11299)	3/23/1999 12:33:00 PM
From: Marc	Read Replies (1) \| Respond to of 16960

For 3Dfx, Winning PC Makers' Loyalty Is No Easy Game By Marcy Burstiner TSC Staff Reporter 3/23/99 11:26 AM ET SAN FRANCISCO -- Graphics chips, a longtime must for video gamers and a few others, are suddenly in demand among PC makers. So 3Dfx Interactive (TDFX:Nasdaq) should be poised for some solid revenue growth, right? Maybe not. 3Dfx is finding that unless it builds the kind of cozy relationships with PC makers that it has with the gamers, the company could be all but shut out of the graphics market as it enters a period of explosive growth. Since its founding in 1994, 3Dfx has thrived on hard-core video gamers, who buy 3Dfx Voodoo add-in cards in stores like CompUSA (CPU:NYSE) and Wal-Mart (WMT:NYSE) and install them in their own computers. This following has driven up revenue to $202 million in 1998 from just $6.3 million in 1996. These days, the loyalty of gamers isn't enough. Now that the Internet is making graphics capability essential for computers, manufacturers like Dell (DELL:Nasdaq) and Compaq (CPQ:NYSE) are selling boxes with the cards preinstalled. And for the most part, these machines use chips from 3Dfx rivals ATI Technologies (ATYT:Nasdaq), Nvidia (NVDA:Nasdaq) and S3 (SIII:Nasdaq). Graphics chips have moved from being a high-end frill to a standard feature on low-end computers. Compaq spokeswoman Hedy Baker says that, until recently, 3D graphics capability used to be limited to computers selling for at least $1,700. But now, even the Presario 5240, which sells for $999, includes ATI's 3D Rage LT ProGraphics card. "It looks like [the 3D Rage card] is becoming more the norm," she says. Nowadays, average consumers want to design home pages and edit photos on their machines, says Dell spokesman Bill Robbins. "Customers are demanding PCs with significant graphics capabilities to handle tasks like Web creation and DVD movies," he says. While 3Dfx has a 73% share of the retail sector, it holds just a 5% share of the much larger OEM market. But the more the boxmakers preinstall the chips, the less incentive people will have to buy add-in cards, says Peter Glaskowsky, a senior analyst for MicroDesign Resources. For its part, 3Dfx isn't sitting still. Late last year, Gateway (GTW:NYSE) and Micron Electronics(MUEI:Nasdaq) started to use 3Dfx chips in their machines. The company is close to similar arrangements with three other boxmakers, says 3Dfx CEO Greg Ballard. And its December purchase of controller-board maker STB Systems (STBI:Nasdaq) will give it a more direct sales channel into OEMs. 3Dfx is also forcing boxmakers to take notice by strengthening even further its standing with consumers. The company is launching a $20 million marketing campaign centered on glitzy TV ads by the "Got milk?" ad firm Goodby Silverstein & Partners. That's nearly 10 times more than the company spent last year to market its Voodoo II card. But it's a small price, Ballard says, if the message works. "The promise we make is that we will be the technology leader and consumers will never have to buy a 3Dfx chip and worry that it's second-rate," Ballard says. "That's the same thing that Intel (INTC:Nasdaq) has done." Ballard says that his model isn't just Intel, but Nike (NKE:NYSE) and Coca-Cola (KO:NYSE), companies that have drummed up huge consumer demand for ordinary products through clever ads. If the boxmakers don't take to 3Dfx chips, the company may find that the most fitting historical model is neither Intel nor Nike, but Apple (AAPL:Nasdaq), a company that inspires strong devotion, but even with clever advertising, has trouble moving beyond the periphery of the computer world.