3Dfx Bull's Rebuttal
Louis Corrigan (TMF Seymor)

Jeff seems to agree that 3Dfx's technology edge should lead to fast rising sales in the short term in the niche gamer market, but that a sustained stock move requires that 3Dfx become a player in the mainstream market. Fair enough. Still, 3Dfx's niche strength today should more than support the stock, giving an investor time to gauge Banshee's chances.

Jeff's main caution is that 3Dfx's superior technology and brand name may mean little compared with Intel's key market position. He also echoes Dale Wettlaufer's argument that branding doesn't work until a company has become the technology standard.

I don't buy it. To take Jeff's far-afield example of Reebok, here was a company whose brand ultimately couldn't compete with Nike because its cachet depended on fashion in a market ultimately driven by technology and performance. From its inception, Nike focused furiously on these drivers and created a great brand by signing up brash, superior athletes to bring the message home. Reebok never understood its own business whereas Nike both understood it and created it through a branding process that reinforced the underlying reality: its shoes were not just cooler, but better. 3Dfx is the Nike of its market.

Of course, shoes are not PCs. One key difference is that PCs require some technology standards. But given that 3Dfx's Voodoo platform already supports Intel's AGP interface, there's no incompatibility problem. Even more interesting, it's not clear why Intel should prefer to see Real 3D dominate the 3D chip market if 3Dfx can continue to offer technologically superior products at a fair price.

Crazy? Intel's raison d'etre is selling ever faster microprocessors in ever greater quantities. Intel works technology niches largely to put pressure on other players in these ancillary markets and push the price/performance equation for these components, because that increases microprocessor sales. Part of what drives these sales are upgrade cycles unleashed by new software requiring increasingly high-powered hardware. The game developers who love 3Dfx's Voodoo chip are among the folks creating such software.

The reality, then, is that 3Dfx's branding strategy ought to work in its market because that market is more akin to Nike's than to Intel's. Intel's technology lock-down followed from its technology and manufacturing excellence and was designed to squeeze out the cloners. But there's not likely to be a similar technology lock-down in the 3D chip market, just a continued race for performance as in the athletic shoe market. Just as Nike signed up iconoclastic track stars and, later, Michael Jordan to foster the brand and drive sales, so too has 3Dfx won the support of software stars. The analogy strains, but if 3Dfx is like Nike, then Intel is like the NBA. It doesn't need to make basketball shoes; it just needs a Jordan to drive ticket sales. Collectively, 3Dfx and its game-making compatriots are like Mike, and that ultimately benefits Intel.

As a fabless chipmaker, 3Dfx has some added manufacturing risks, but such leanness allows the firm to concentrate on R&D while eventually picking and choosing among low-cost suppliers. Nike is similarly "fabless."

Plus, the broader trend in the PC business, spurred by Dell's remarkable success, is toward made-to-order boxes configured to the user's specific needs. This manufacturing model emphasizes just-in-time delivery that allows adept PC makers (that is, the only ones that will survive) to ship PCs with the latest technology. This favors performance leader 3Dfx, as long as its prices are competitive. Moreover, tighter inventory management actually strengthens smaller, more nimble component producers because PC vendors end up paying suppliers more quickly in order to keep the wheels greased. So Intel's working capital advantages are being mitigated by the market's increasing efficiency.

Bottom line: You've got to feel pretty good about a company when its top competitor would rather see it succeed spectacularly than fail.

Next: The Bear Responds