Margins squeeze graphics

Electronic News, Feb 16, 1998 by Peter Brown

San Jose, Calif.--As PC OEMs drive into the sub-$1,000 computer market, graphics chip vendors are being forced to sell their chips at prices that are squeezing profit margins. Although some graphics houses planned for segment zero (the under $1,000 PC) and others are struggling with it, still others are steering clear of the market entirely until the margins become more attractive. Industry observers believe this is leaving sub-$1,000 machines with mediocre graphics capability. Since only cheap 2-D/3-D graphics devices are available for integration, there is little room for differentiation. Observers predict that future generations of segment zero PCs will not only avoid this problem, but will add more feature rich content such as teleconferencing, Intel's Accelerated Graphics Port (AGP), and DVD and TV tuning. But in the meantime, PC consumers are left graphics poor. Graphics chip producer S3 claims it anticipated the low cost PCs. "Segment zero is something we saw coming. Because we made our roadmaps for this market, we are well positioned," said Glenn Schuster, director of marketing for mainstream products at S3. "The margins are indeed lower than our traditional margins but that is because of the market itself. But we planned for it.

If S3 saw the zero segment market coming, it missed the change in graphics chips for high end PCs. "At the high end of the market we are still struggling," Mr. Schuster admits,"but we are taking measures to correct that." As part of S3's attempt to fix its high performance woes, the company plans to introduce two new architectures for graphics accelerators targeted at the high end, high performance portion of the market. One of these engines might include feature sets from Microsoft's Talisman architecture, S3 said. In addition, to reducing its expenses, it began a restructuring program in January that included cutting its workforce by 100 employees (EN, Jan. 26). Mr. Schuster sees PC OEMs trying to "cram" as much technology at the right price point into their low cost PCs. As a result, the industry should see the high performance graphics of today in segment zero in a year or so.

Spawning Innovations

Neil Trevett, VP of marketing at 3Dlabs, said the sub-$1,000 PC market is going to spawn some interesting innovations including CPU manufacturers trying to integrate graphics performance into their CPUs. Cyrix, a wholly owned subsidiary of National Semiconductor, has already attempted this with some of its microprocessors, but the results have been disappointing so far, Mr. Trevett added.

This approach may not be a viable solution because many critics of this technology believe the graphics market changes too quickly so a microprocessor could be obsolete before it reaches the market. Mr. Trevett added that graphics will be a differentiator in this market once the current product cycle times go through another generation and these high powered devices can be sold cheaply. According to Lew Paceley, VP of marketing at Nvidia, the low margins for graphics chips is a temporary phenomenon. He sees price reductions of CPUs easing the price pressure on the graphics vendors. PC OEMs are achieving a certain price point right now without concentrating on the side effects to the chipmakers, he added. "The PC OEM is going after market share right now," said Mr. Paceley, "and that is why Compaq is doing so well. But that has put a lot of pressure on the graphics vendors. Now you can get OK graphics but nothing earth shattering and that is what everyone seems to be demanding these days. When a new generation of CPUs hits this market, we will see the price pressure on graphics go down and maybe even see people paying $10 or $20 more to upgrade their graphics engine." NVidia is not participating in the segment zero marketplace now. But that could change as the price pressure is dropped, said Mr. Paceley. Because there is less price pressure in the high performance segment of the market, many graphics vendors are concentrating on that segment. Graphics chip maker Rendition is also staying out of the low-end market for now, but could get into it as today's high end graphics accelerators become the segment zero accelerators of the future. Jay Eisenlohr, VP of marketing at Rendition, said most margins in this market are almost half of what they are in the high-end graphics market, leaving little room to grow revenue streams.

"A good strategy, however, might be to upgrade into a better graphics engine, spending a few more dollars here or there," said Mr. Eisenlohr. "It is now very hard for graphics companies to cover the entire PC market and I really doubt anyone will really try. Segment zero is still young and fragmented. If you keep in mind how fast technology is moving, the graphics engines we see now in the high performance arena will be in a sub-$1,000 PC space in 12-18 months."

Integration The Key?

Chromatic Research's Mpact 2 graphics processor was developed specifically to target the sub-$1,000 market by integrating various features onto one chip including modems, audio, and video, plus more features as they become available. Chromatic believes that it will be cost effective for PC OEMs to purchase one chip rather than have to buy a chip for each individual function for video, audio, modem and graphics.