Who will be the winners and losers?

There is one thing certain about the graphics chip industry in 1998. There will be a lot of losers.

"There are 35 people that are going to announce products this year and another 10 we think are going to announce products," said Glenn Schuster, director of marketing for mainstream graphics products at S3.

"That means there are 45 people working on products in the same market. We feel in a year to two years there will be a half-dozen."

Low margins and relentless development pressure will likely lead to a massive consolidation in the graphics processor industry, a number of executives and analysts said. How and when that happens will become one of the main themes for the semiconductor industry as 1998 continues.

"S3 claims that they will be ready with new processors this year. It will keep them up there. Otherwise, they will be in trouble. Nvidia, ATI, Rendition: These are the companies that will survive because they have good designs and good people," said Peter Glaskowsky, graphics chip analyst for MicroDesign Resources. "3Dlabs, you can include them too."

One executive at a major graphics chip company claims that the vendors that team up with Intel will be the ones that survive. Current examples include ATI and 3Dlabs.

Others will fade away. One prominent example: "Oak Technology is on its way out of the business," Glaskowsky said.

"Consolidation? There will be lots," said Arun Veerappan, semiconductor analyst for BancAmerica Robertson Stephens, who picked 3Dlabs as likely to be a strong survivor.

"With 3Dlabs, the Permedia for them is doing reasonably well and they signed a collaboration deal with Intel," he said.

The anticipated wave of consolidation in many ways

Peter Glaskowsky

is a mirror reflection of the nature of the industry, said Glaskowsky. Although 3D processors require intense design efforts, most sell in the $20 to $30 range. Vendors, therefore, have to make up the $10 million or so in development costs in volume.

Which is tough. Despite the intense nature of the competition, new players and new chip designs continue to enter the market, he added. As a result, vendors cannot rest on the laurels of a large market share or any advantage that comes from an innovative design. The lead shifts often.

"The deal is that many of these companies just give up," Glaskowsky said.

Michael Hara, director of strategic marketing at Nvidia, believes that the consolidation will occur by market segments. Eight or so graphics vendors might survive, but there will be only two to three in each end of the market.

One company that is already beginning to drop out, according to many, is Cirrus Logic. That company recently granted a cross-license on its graphics patents to S3. While Cirrus retained the right to continue to make graphics chips, it no longer manufactures the money-making chips that high-end PCs require, said many.

Dean McCarron, principal analyst at Mercury Research, points out that one company's failure represents another's success. Market share has slid from dominant powers to smaller, more nimble players. Mercury Research, in fact, expects the number of leading manufacturers to grow slightly.

Nvidia, 3Dlabs, and 3Dfx all gained market share in the fourth quarter, he said, while S3, ATI, Trident Microsystems, and Cirrus lost out. Despite losing share, of the traditional makers only Cirrus appears in danger of an overnight exit.

"So, for the first time in years, we're actually seeing a deconcentration of the industry," postulated McCarron.  

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