StockTalk:
TMF Interview With 3Dfx President & CEO Greg Ballard
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)

June 3, 1998

Hello and welcome to another edition of StockTalk with Yi-Hsin Chang and Brian Graney. Joining us today is Greg Ballard, President and CEO of 3Dfx Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %>. Founded in 1994, and based in San Jose, Calif., 3Dfx makes 3D graphics accelerators, which enhance the quality of graphics on computers and arcade machines for smoother, faster, and more realistic game play. Its products include Voodoo 2 (also known as V2), V2's predecessor Voodoo Graphics, and 2D and 3D accelerator Voodoo Rush. The company is also working on a new product, the much anticipated 2D/3D accelerator called Banshee.

TMF: Thank you for talking with us today, Mr. Ballard.

Ballard: Well, it's a pleasure to be here.

TMF: Many of our readers would like to know the status of Banshee. Is it on schedule for release in the third quarter? And with new products coming out from your competitors, do you still think Banshee will be the fastest on the market?

Ballard: It is still on track. We are very excited about it. Everything that we've been doing in the laboratory to test it verifies that it's as good, if not better than we had expected. The schedule appears to be within the time frame that we had expected. Yet, is it going to be the best performing chip in the marketplace? That's the question everybody always asks. I will say that we have consistently delivered everything we've always said we were going to deliver. When we told people what Voodoo 1 was going to do, it did that. When we said what Voodoo 2 was going to do, it did that. And when we tell people what Banshee is going to do, it's going to do that as well.

"The interesting thing was that the No. 2 chip in the market in terms of performance was Voodoo 1. All of those so called `Voodoo Killers' from last year failed to even meet our first-generation technology."

The one thing we don't know, of course, is whether our competitors' chips will perform to the level and specifications that they've claimed. In the past, one of the things that's happened is that people have believed the specifications of a company, and it's only some time later when the actual tests are done that we discover they are not as good as people thought. I'll give you an example of that, if I may. The introduction of a number of chips in the fourth quarter of the holiday season of last year were styled "Voodoo Killers" at the time, and we kept telling people, "No, if you look at the frame rates in games, Voodoo is still the strongest technology in the business." Then we released Voodoo 2, and the debate went away for a time.

We are just now getting the release of a new index by Ziff-Davis <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZD)") else Response.Write("(NYSE: ZD)") end if %> CGW [Computer Gaming World magazine] that is called Game Gauge, which actually measures the performance of an accelerator across six titles. This measures, basically, how fast it plays the games. When that test was conducted against all the chips in the marketplace, not surprisingly, Voodoo 2 was No. 1. But the interesting thing was that the No. 2 chip in the market in terms of performance was Voodoo 1. All of those so-called "Voodoo Killers" from last year failed to even meet our first-generation technology.

So when people talk about, "Are you going to be able to stay ahead of people," etc., my answer to that is, so far they haven't even caught [up to] our oldest technology, much less are they threatening our newest technology. We can be proven to be wrong, and I don't want to sound arrogant, but we have consistently been able to deliver the leading performing chip to the marketplace, and we expect that to happen in the future as well.

TMF: One of the things that really interests us about your company is your marketing strategy pertaining to the 3Dfx logo being on video games that actually include 3Dfx technology in the same way Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> ramps many PCs with the "Intel Inside" designation. Can you tell us a little bit about that marketing strategy and how it might help 3Dfx down the road if a supplier, such as Intel, enters into your market as a competitor?

Ballard: Yes. It's not just Intel. It's our other brandless competitors as well. You know, the notion of a brand is something that is very familiar to consumers, and it's very familiar to people in the video game and computer game business. Yet, it's an absolutely foreign notion to people in the semiconductor business.

For those of you who follow the company, you may know that I actually come from the software side of the business, having run a video game company called Capcom. So my natural inclination was that this is an opportunity to brand something, and we have spent a fair amount of our resources and mindshare in doing that. The reason we've done that is because in the end, what people care about is reliability of the experience. They don't care about bits and bytes. They don't really want to know about Winbench [which assesses 3D performance] numbers because to most consumers, that's all nonsense. What they really want to know is that there's a company that has managed to break through the noise as being reliably the best experience.

There is an enormous amount of consumer inertia that surrounds brands. I could make the argument -- although I needn't -- that even if somebody did have in the holiday season this year a better accelerator in terms of technical performance, I would assert that that probably doesn't matter in the end because the momentum that surrounds brand always ends up being more important than temporal performance deltas between companies.

"One of the ways we keep them [new products] from eclipsing existing products is that we don't talk about them."

A good example of that is any brand. To some extent, nobody cares anymore if Coca-Cola tastes better than Pepsi; the brand dominates. Nobody really asks the question as to whether Nike has the best shoes. I mean, people buy Nike because the brand has become part of the experience of owning those shoes. And you can go through a whole list of brands in the world, and that continues to be the case.

I think from an investor's viewpoint, from a company's viewpoint -- not from a consumer's viewpoint necessarily -- we've created a fair amount of competitive advantage and protection from having a brand. We will continue to invest in that in the future. As a matter of fact, in the second half of this year, you are going to see a substantial increase in the amount of branding activity that we do.

TMF: What new products do you have in the pipeline that will help you maintain marketshare and mindshare? How will you keep these new products from eclipsing existing ones?

Ballard: Well, that's a very good question, and one of the ways we keep them from eclipsing existing products is that we don't talk about them. We do have a very active roadmap, one that we are convinced is the best roadmap in the business. But because we do have the best-selling products in the market, we are always more cautious talking about those products than people who don't have products selling in the retail market.

For example, when all these announcements about new generation parts were coming out, we had to bide our time because we know how good Banshee is going to be, and to some extent -- and more importantly -- we know how good the follow-ups to Banshee are going to be at a later time frame. But if we start talking about those, we risk confusing consumers, and we risk upsetting the marketplace that we have now. So, we will announce those products when the time comes. In the meantime, people with less vested interests and needing to take greater risks are going to announce parts that may or may not live up to their expectations, so they don't have to worry so much about hurting their existing market.

TMF: We know you can't talk directly about the share price of the stock, so we're going to try to talk a little bit around it. Maybe if you could comment on the possibility of graphics accelerators -- especially the chip sets -- becoming a commodity product like DRAMs [dynamic random access memory chips] and the problems that industry has seen recently. Is that really a threat for 3Dfx going forward?

Ballard: I don't think it's a threat for us. I do think it's a threat for people who have not invested in brand and content. One of the things that we did when we began this company was recognize that this was potentially a marketplace in which commodity-like products and pricing could happen. The entry of Intel into this business is an example of that threat happening. But from the very beginning, that was one of the reasons why we created the brand, one of the reasons why we have worked so closely with the content providers. To make sure that there is content unique to 3Dfx in the marketplace is to be able to keep above the commodity line.

One of the things that is going on with the stock prices of all the companies in this sector right now is the fear that Intel coming in has essentially reduced the market to a commodity business. Our answer to that is far more unique than anybody else's. We are at the high-end of performance. We have a brand strategy. We have content that in many cases only plays on 3Dfx. Those things combined make us the differentiated product in the market. So, ironically, we would say that while some of the price pressure on other company stocks may be justified, with respect to us, we think the concern about Intel is wholly misplaced.

"One of the things that is going on with the stock prices of all the companies in this sector right now is the fear that Intel coming in has essentially reduced the market to a commodity business."

TMF: Some of our readers have noticed shortages of products such as Voodoo 2. Are you having problems meeting demand or is it just flying off the shelves?

Ballard: Well, the good news is that the person who got there right before that person didn't experience that shortage. The bad news is that the person who experienced the shortage walked away and probably didn't buy the product that day -- but probably didn't buy anyone else's product that day either. We did experience a shortage to some extent, but that's the normal shortage of ramping up a chip like this. It's not much different, for example, than the Nintendo experience when they introduced Nintendo [game units], or the Sony PlayStation experience when they introduced the Sony PlayStation.

It just takes a while to build the market presence for this. The good news is that there's enough demand out there that even as we put these things on the shelves, they've been disappearing. In fact, we are now at the point where people are going to start seeing these on the shelf in enough quantity that they are not going to have to walk out of the store disappointed. It takes a little while to get there, but it always does with any new product.

TMF: Where is the industry going in general, and where do you see 3Dfx's place in it for the future?

Ballard: Well, we think there is going to be some consolidation in the business. We think you are starting to see that in the pressure on the prices of some of the other companies' stocks. You are seeing it in some of the companies that were trying to go public having difficulty going public. On the other hand, we think that in the consolidation there are going to be two or maybe three clear winners. We think we are going to be one of them, if not the biggest winner. So over the next six to 12 months, there's going to be a useful and helpful shakeout in the marketplace that will leave fewer competitors chasing greater dollars with larger marketshare. We are pretty confident based on our results in the retail channel that we'll be able to extend our presence there into the OEM [original equipment manufacturer] market in late '98 and early '99 and continue to grow as the leading company at the higher end of the performance part of the business.

TMF: Mr. Ballard, thank you very much for joining us today in a very interesting discussion.

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