Nvidia girds for graphics chip battle

NVidia, with its 3dfx acquisition, is stepping up its efforts to become king of the hill in the graphics market.

The graphics chipmaker, which on Friday announced its intent to purchase certain assets from competitor 3dfx, outlined the details behind the move on Monday.

The chipmaker snapped up 3dfx in its aim to lock up the desktop and move on to new markets, with the stated goal of being all things -- desktop, mobile, and integrated -- to PC makers and consumer electronics companies.

The purchase gives nVidia some needed intellectual capital, including about 100 design engineers, whom it expects to retain, and technology, including three future generations of forthcoming 3dfx graphics chips, and seven patents, among other things.

The purchase is also a sign of tough times in the graphics business. As graphics chips increase in complexity and design cycles compress due to the frequency at which PC makers refresh their offerings, competitive pressures have increased.

Many graphics chipmakers including 3dfx have been pressed into merging or selling, as evidenced by a widespread consolidation in the industry and the relative lack of startups.

However, Jon Peddie, principal at market research firm Jon Peddie Associates, cautions that there are still more than a dozen players in the graphics market, including nVidia, ATI Technologies, Matrox Graphics, 3D Labs, ST Microelectronics, Silicon Motion, Trident and Acer.

"If you look at any of the companies that have failed in their market, the failure has always been because of manufacturing," he said.

3dfx, for instance, wasn't known for its prompt product delivery, he said.

NVidia chief executive Jen-Hsun Huang, in a conference call for analysts on Monday, described 3dfx's engineering staff as "world class" and its next-generation products as "breakthrough".

However, those designs simply "ran out of runway" financially, he said. NVidia wasted little time in buying up 3dfx's most important assets before the company went belly-up.

"The increase in our engineering talent will allow us to bring products and development to market sooner and address incremental markets, all of which should increase the rapid revenue growth rate of nVidia," Huang told analysts Monday.

NVidia will look to boost its market share with the deal. Thanks to 3dfx's technology and customer base, nVidia expects it can garner between 60 and 70 percent of the retail market share for graphics boards.

NVidia will also likely continue 3dfx's Voodoo brand name.

Even so, "We haven't completely sorted out all of the brand positioning," Huang said. "Where we could really take advantage of the Voodoo brand... is in the retail market all over the world."

NVidia will control 3dfx's forthcoming Rampage graphics chip, due next year, as well as two further generations in the future that are now in development and are under evaluation.

NVidia enjoys similarly high market share among PC makers and in the reseller channel's so-called white box PCs, where it claims 50 percent and 40 percent share, respectively.

NVidia is looking to expand its business past the high-end desktop and workstation markets.

The 3dfx deal gives nVidia more firepower to go after its primary rival, ATI Technologies, and also Intel.

ATI's offerings match nVidia's in all but one market, Peddie said. ATI is also well ahead of nVidia in the mobile market and also the integrated graphics chips sector, thanks to its acquisition of start-up Artx.

So far in the mobile market, nVidia has secured Toshiba as a customer for its first mobile chip, dubbed GeForce2 Go.

Peddie points out that GeForce is a high-end chip, aimed at more expensive desktop replacement notebooks.

In the integrated chipset space, Intel has a virtual lock on the market, due to its integrated graphics chip sets for low-cost systems. VIA Technologies is a distant second with its S3 Graphics joint venture. VIA is also the largest supplier of chip sets for Advanced Micro Devices.

"NVidia will probably not be successful in terms of units shipped," Peddie said. "However, it could sell fewer parts and mark more margin than all of the others [making it successful, financially]."

NVidia wants to be top dog in the graphics market, but that spot is not guaranteed, what with the likes of ATI running around.

"If the market goes down to two players, it'd be ATI and nVidia," Peddie said.

The terms of the 3dfx deal include a payment of $70m in cash and 1 million shares of stock. At the same time, a patent infringement suit filed by 3dfx against nVidia will be dismissed. The sale should close in the first quarter of nVidia's 2002 fiscal year, which begins in January, company officials said.

Take me to ZDNet Enterprise

Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet News forum.

Let the editors know what you think in the Mailroom. And read what others have said.