Never before have so many worked so hard for so little.
This may very well sum up the graphics chip market today.
Analysts who follow the graphics chip market say profit margins have always been lean. But they also say the tilt toward low-cost computers is making matters worse for all but the top-of-the-line graphics chips--and in the process shrinking profit margins for the majority of manufacturers.
"We call it a winner-takes-all market because if you're a winner, you're going to make a lot of money," says Jonathan Joseph, an analyst with Nations Banc Montgomery Securities. "If you're a loser you will lose money, and there doesn't seem to be much in between."
Importantly, Intel's entry into the market today (see Intel's March on the Inside) makes this winner-takes-all depiction of the market even more poignant. By 1999, Intel is expected to snag between 20 and 30 percent of the graphics processor market in the "performance" desktop PC segment, which itself will account for close to $1 billion in revenue, according to Jon Peddie, president of Jon Peddie Associates, a Tiburon, Calif.-based analysis firm.
As companies design faster and more sophisticated chips at an ever-increasing rate, graphics processors that only nine months earlier defined the premium class become second-tier. This dizzying speed of innovation makes it hard for companies to recoup the costs of developing their chips, analysts say.
"The product cycles are so extraordinarily fast that it's much harder to keep pace," explains Drew Peck, an analyst for Cowen & Company. "The technology is turned upside down every nine months. You're talking about a product [whose] complexity is comparable to that of a microprocessor, so you'd assume that the research and development is comparable."
Graphics chips are the most critical piece of silicon in personal computers today, after the main microprocessor. These chips handle the manipulation of images users see on their computer screens and are increasingly important as computer interfaces and 3D games become more sophisticated and demanding.
The entry of hip new companies such as Nvidia, NeoMagic, and 3Dfx has accelerated the already brisk pace of innovation. Dean McCarron, principal analyst for Mercury Research, calls such companies "high-performance, boutique" newcomers. "The old guard is facing competition from makers that didn't exist two years ago," says McCarron.
But analysts point to other pressures keeping graphics chips low, most notably low-cost PCs and other electronic devices.
PC manufacturers have always jockeyed for the lowest-priced components for their systems. But whereas they could afford somewhere between $17 to $19 per graphics chip for a PC that lists near $2,000, they now budget only $8 per chip for low-cost machines, which sell for $1,000 or less. As sales of low-cost PCs grow, so does the demand for cheap graphics chips.
To be sure, there is still plenty of money to be made selling cutting-edge graphics chips. The difficulty is to remain a money maker in a market that moves at such a breakneck speed.
"The key to this business is to stay on the cutting edge, and to date, nobody has been able to do that," says Cowen & Company's Peck. "The margins are good only for the guy at the top, and that has proved to be a precarious place to be over time. Some of the larger companies that once dominated are now running as fast as they can into other markets."
Meanwhile Intel is expected to ramp up production volume on its new graphics chip quickly. Between five to ten million of the graphics processors will ship this year, according to MicroDesign Resources.
In 1998, 2D/3D chips for the performance market will account for approximately 71 million of the estimated 113 million graphics chips shipped, said Peddie.
"Even though Intel will do well, it's not the end of the world for everyone else. Intel will have 20 to 30 percent of the market, which leaves 70 percent for everyone else in a growing market," said Peddie. "Board makers are going to do well," he said.