Friday, May 16, 2008
Keep the gamers happy, and the world is yours: How one 3-D graphics company shrugged off a recession and vanquished every foe.
May 15, 2002 | The players at Next Game rarely look back. As they man the computers at this game center in San Francisco's Japantown, they're too busy concentrating on what's ahead. Thunderous percussions of grenades and automatic-weapons fire jostle out of speakers as the gamers sit before oversize monitors, hands flying over keyboards and mice, playing round after round of Counter-Strike or Medal of Honor.
What's ahead could be an enemy popping into sight on-screen or the newest game of the moment or a tweaked hardware component that might squeeze out a crucial performance enhancement -- like a precious extra frame per second (fps) of computer video, enough to give the player a virtual reaction-time boost that could be the difference between life and death.
These young men are only renting the Next Game machines, but they represent a larger community of hardcore gamers whose passions drive an entire industry. Even as major PC manufacturers such as Gateway and HP struggle with lowered earnings expectations, razor-thin profit margins and sluggish growth, one sector of sales remains healthy. The high-end gaming PC is in such steady demand that it alone keeps specialized manufacturers such as Alienware, Falcon Northwest, Voodoo Computers and others healthy. The rigs produced by these companies, costing upward of $6,000, are tricked out with fast processors, big monitors, artistic cases and the latest "3-D accelerator" technology -- these days a GeForce 4 chip from Nvidia or a Radeon 8500 from ATI.
They're the fast and furious of the PC world. And their specs are a moving target. A true gamer might replace part or all of his setup each year simply to play the newest games, games that each season further push the limits of what a computer can do. Just try running this year's leading-edge entertainment on a computer from a year or two ago: In addition to getting suddenly sluggish frame rates, you'll also miss realistically rippling water effects, the glint off an opponent's helmet, or smooth, jag-free edges. To the true believers, yesterday's tech is less than useless. It's an insult.
On the other hand -- to the dismay of the PC industry -- the vast majority of productive users have been realizing for several years that they don't really need a faster, newer computer just to run Microsoft Office. Though both Apple and Microsoft are scrambling to build new graphics features directly into their operating systems, such as translucent widgets and drop shadows that will drag current computers to a crawl, PC manufacturers are facing a hideous fact: Most buyers find that their two-year-old machine runs just fine, thank you.
Couple that with a shaky economy prompting businesses to hold off on capital improvements, and you're looking at trouble for the consumer PC industry. But not where gamers are concerned. The market for 3-D accelerator cards alone -- chips specifically designed to make computer graphics snap, crackle and pop -- is worth almost $10 billion a year in sales to consumers and computer manufacturers.
These chips aren't meant solely for testosterone- and Mountain Dew-fueled boys or lonely men spending hours in their custom-designed flight chairs, mastering the latest jet-fighter sim. Computer gaming pervades modern culture, threatening to unseat or overwhelm even Hollywood as an arbiter of cool. As a nexus of recreation, entertainment and computers, gaming has become a focal point for social concerns and entrepreneurial energy. The companies that make 3-D accelerators are feeding the dreams of a generation that seeks virtual reality entertainment on an ever more immersive, ever more addictive scale.
It's a big market, and it's getting bigger all the time, but it is also absurdly fast-moving and turbulent. And though the companies that make graphics chips increasingly serve a mass audience, their own profitability is pinned to keeping hardcore gamers satisfied. And that is no easy task. Gamers are fickle -- their loyalty is not to brand but to performance. Indeed, one company, 3Dfx, which played a pivotal role in building this mighty market, was itself fragged barely two years after dominating the industry.
In 1996 3Dfx Interactive virtually created the demand for consumer-level 3-D acceleration hardware. Within two years it was king of the hill, with a capitalization of over $200 million. Yet by the end of 2000, the company was bankrupt and sold for parts. It's buyer, Nvidia, meanwhile went from nowheresville to defining the legitimacy of the market. In late 2001 Nvidia was named to the S&P 500, replacing former high-flier Enron. While all around it the mightiest tech companies were falling victim to the dot-com bust, the telecom market collapse and the ensuing recession, Nvidia surged from strength to strength. In late April, when as a result of an SEC investigation Nvidia had to restate several years of earnings, the company ended up reporting that it had earned more profits than previously indicated.
Does that mean catering to gamers is a foolproof business model? Not necessarily, or 3Dfx wouldn't have stumbled while Nvidia leaped forward. What, then, explains Nvidia's success?
Cynics look at Nvidia's close relationship with Microsoft; the company was one of the first graphics chip makers to endorse Microsoft's software protocols for technical gaming support, and it was also chosen to manufacture the Xbox graphics processor chip. But Nvidia's success is as much a tale of 3Dfx mistakes as it is of canny Nvidia prowess. Nvidia proved able to move with the agility necessary to keep up in a market keyed to hardcore gamer needs. 3Dfx, in contrast, promised too much and then failed to deliver.
Together, the contrasting fortunes of Nvidia and 3Dfx help fill in the background to an explosive period during which computer gaming rose steadily in cultural and economic prominence. The story of Nvidia's rise, and rise, demonstrates how great the rewards can be for feeding the voracious maw of gamers who are always desperate for what's better and faster and flat-out cooler. But the moral of 3Dfx's decline, and fall, is that in this world of bleeding-edge technology the mighty can self-immolate at any moment. All it takes is another frame per second for another itchy trigger finger.
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