H&Q Conference: Nvidia Plays King of the Hill

Leadership of the graphics-chip industry seems to change every six months. Nvidia wants to change that.
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SAN FRANCISCO -- The semiconductor industry isn't often given to drama. The communications-chip market is growing so fast, all players but the most inept seem to profit. In PC chips,

Intel

(INTC) - Get Report

holds a near monopoly -- where's the fun in that?

Graphics chips are different. The chips themselves carry names like "Savage" and "Voodoo" (compare that to the anodyne "Pentium") and enable shockingly vivid depictions of blood and gore. Plus, graphic chip companies contract out manufacturing. In the past that has meant a team of key engineers at one hot chipmaker could walk out, start their own company, come out with a nifty new chip and quickly take over the market. As a result, dozens of companies were constantly winning and losing market share.

As video games have gone from two dimensions to three, the number of pixels on a screen has increased, requiring an increased complexity in chip designs. "Each pixel requires tens of thousands of calculations," said Jen-Hsun Huang, CEO of

Nvidia

(NVDA) - Get Report

, at the at the

Hambrecht & Quist Technology Conference

. This has made it more difficult for new companies to enter the market, he said. Nvidia's new chip, the TNT2, is just as complex as Intel's Pentium III.

"What they're doing is pretty complex," said George Iwanyc, a chip analyst with

Dataquest

. "They are using a lot of transistors and that's comparable to what Intel is doing."

Meanwhile, the graphics-chip turf remains just as hazardous for established companies. Huang has seen former leaders like

Cirrus Logic

(CRUS) - Get Report

disappear from the graphics scene entirely.

That has the left the market with just seven or eight key players and that number will continue to shrink, Iwanyc said. The fewer the players, the more intense the competition.

3DFX

(TDFX)

recently turned up the heat by launching its new Voodoo3 chip with a $10 million television advertising campaign. On the publicity, 3DFX's stock price doubled from 11 1/2 on March 26 to 23 on April 14, but the novelty has since worn off, with the stock drifting down to 16 this week.

But Huang, whose company went

public on Jan. 22, doesn't seem bothered by 3DFX. TNT2 is beating Voodoo3 in performance. And, these days, Huang's eyes are focused on the market leader,

ATI

(ATYT)

.

While 3DFX tries to take on ATI with humorous commercials, Nvidia is fighting back by amassing the biggest pool of engineers. The company has three separate engineering teams to work on three different sets of products, so that even as it prepares to ship the TNT2, two teams have already been working on the next rollout. This is a defensive move, designed to keep competitors from leapfrogging Nvidia. But it's also offensive, helping it leapfrog the others. Huang hopes the strategy will finally end the six month turnover in chip leadership -- and keep Nvidia on top.

Also striving to

topple ATI is

S3

(SIII)

. S3 recently debuted its Savage4 chip, which won the support of

Compaq

(CPQ)

. Some investors seem to feel that ATI is ready to stumble. The short interest on the stock stands at 6.6 million shares, 32 times the average daily volume of 208,000 shares. But when the toppling will start isn't yet clear.

The suspense is building.