3Dfx Grabs Gigapixel

Electronic News, April 3, 2000 by AriK Hesseldahl

Displaying a new ambition to get into the consumer electronics market, 3Dfx Interactive Inc., the troubled PC graphics card maker, said last week that it would pay $186 million for Gigapixel Corp., a graphics chip start-up.

The acquisition followed what appeared to be Gigapixel's disappointment at not getting its planned graphics chip designed into Microsoft Corp.'s forthcoming X-Box game console. The two companies had apparently been working closely together on the project, yet at the last minute learned that Microsoft had instead selected a chip from Nvidia Corp.

Analysts had seen losing the X-Box account as a fatal blow to the three-year-old Gigapixel, which has yet to deliver its first product.

"Gigapixel has essentially been developing intellectual property related to 3D graphics," said Peter Glaskowsky, an analyst with Cahners MicroDesign Resources. "What they specialized in is an architecture that we have seen pieces of before in other products using a basic technique calling tiling. But Gigapixel has been using that technique in a way that they believe will give them extremely high performance in relatively simple chips."

And the stakes were not small. As the winner of the X-Box account, Nvidia received $200 million cash as a down payment on future chip sales and in licensing fees. When it came down to brass tacks, Microsoft sided with a company that has shown reliable growth in market share and revenue in recent years over a start-up with no proven record.

"Most of us pretty much thought that Gigapixel was doomed after they lost that business," Glaskowsky said. "Once you get the thumbs-down from a company like Microsoft, it's tough to sell your product somewhere else."

Enter 3Dfx, who swooped down upon Gigapixel, offering a price that appears to be a significant premium. Once the market leader in the graphics chip business, 3Dfx has been in a rebuilding phase in recent months, having ceded much of its market share to Nvidia.

And the numbers haven't been good. For its fiscal year ended Dec. 31, 1999, 3Dfx reported a loss of $63 million on revenues of $360 million. The year before it reported almost $22 million in profits on $202.6 million in sales. Its most recent quarter, ended Jan. 31, was no better, resulting in losses of nearly $32 million on revenue of $109.4 million.

So how does a company bleeding money come to pay $186 million for a start-up with zero sales and no product to speak of? Good question.

"I have to wonder how they found $186 million worth of value in Gigapixel," Glaskowsky said. "But you can bet the people from 3Dfx went over whatever Gigapixel has with a fine-toothed comb."

George Iwanyc, graphics chip analyst at Dataquest, said 3Dfx has recently been working on new anti-aliasing techniques for its products and may have seen some good synergies with the work that Gigapixel has been doing. Anti-aliasing is a technique in which the diagonal or curved edges of an image are made smoother by blurring and blending the spaces between individual pixels.

Glaskowsky suspects that whatever 3Dfx saw in Gigapixel, the company must also see an opportunity to expand its market focus away from the gaming insert card business that had been its bread- and-butter for so long, and into other market segments such as consumer electronics.

Alex Leupp, 3Dfxas president and chief executive officer, said in a prepared statement that the company is looking in the direction of consumer devices.

aThe graphical displays on todayas PDAs [personal digital assistants], cell phones, and Internet appliances are lackluster at best,a? Leupp said. aWith this transaction we are now positioned to be the leader in providing advanced 3D technology to enable the era of true three-dimensional visual communication for all consumer electronics devices.a?

But going after that market would be like jumping from one cutthroat market to another. Nearly everyone playing in the graphics chip business wants to get their chips designed into the up-and-coming information appliances that are becoming so popular. Potential customers in that space will drive a hard bargain on prices, making the prospect of healthy profits unclear.

aI canat say that slim margins on low prices is a recipe for greatness, but 3Dfx may be seeing that as their best opportunity right now,a? Glaskowsky said.

Moreover the acquisition comes at a time when thereas been a lot of consolidation in the graphics business. On Wednesday, S3 Inc. issued a cryptic statement saying it is in discussions with several companies to sell its own graphics business. Analysts scratched their heads at the news and wondered what the company has up its sleeve.

aThat was a little weird to me,a? Glaskowsky said of S3as move. aBut they may simply be looking to spin off their graphics operations in order to focus on their consumer electronics aspirations.a?

Last July S3 acquired Diamond Multimedia Systems Inc., maker of the Rio portable MP3 player, for $170 million.