DJ TECH VIEW: Xbox360 Could Boost ATYT Fortunes
27 Oct 05
By John C. Dvorak
A Dow Jones Column
BERKELEY, Calif. (Dow Jones)--When the original Xbox was released by
Microsoft Corp. (MSFT) it changed the balance of power in the industry by
injecting a lot of money and introducing new ideas to the game console
business.
Microsoft is not letting up, and its newest Xbox360, to be released for sale
at the end of November, promises to keep pressure on the game console business.
The first iteration of the Xbox had impact on one supplier in particular. Its
most adverse effect was on the Sega company which, under pressure, ended its
game console business altogether. And the big winner in the deal was Nvidia
Corp. (NVDA), which was the maker of the graphics controller within the Xbox.
Its stock soared and has continued to do well.
Are there any potential side bets this time around with the Xbox360? A lot
will depend on ironing out some early glitches. It's already gotten off to a
rocky start as its wireless components seem to interfere with in-store wireless
networks. This was witnessed by a recent problem at the Wal-Mart Stores Inc.
(WMT) chain where the system was going to be previewed. That should be resolved
quickly.
I have played with and examined the Xbox360 and despite the foul-up at
Wal-Mart there is no doubt that this machine will be a blockbuster success.
That means millions of units will be sold. Wedbush Morgan Securities in a
recent report predicts 2.5 million units sold in the U.S. and Europe alone.
The supplier names that crop up in conjunction with the Xbox are IBM Corp.
(IBM), maker of the microprocessor used by the device; Chartered Semiconductor
Manufacturing Ltd. (CHRT), the second source for the chips; Flextronics
International Ltd. (FLEX), Wistron Corp. (3231.TW) and Celestica Inc. (CLS) as
contract box manufacturers; and ATI Technologies Inc. (ATYT) as the graphics
chip designer/manufacturer.
NVidia hasgone over to the Sony Playstation as its graphics controller maker
after some disputes with Microsoft during its work on the original Xbox.
If the biggest beneficiary of the first Xbox success was Nvidia, would this
mean ATI is the company to watch? That would be my best guess. And since
Flextronics has recently been slammed by the Street, it might also make an
interesting turnaround working with Microsoft. All the companies mentioned
would be worth following, but ATI has the most to gain.
Here's what actually happens to boost the fortunes of a company such as ATI
or Nvidia when it develops controllers for an advanced game console like this.
They are afforded the luxury to push the envelope of the technology with a lot
of expensive R&D to incorporate newer ideas into these cards to make the
displays faster and more realistic. This immediately falls over into the bigger
more profitable PC markets, especially amongst PC gamers and their hot
machines.
Nvidia, for example, is still benefiting from its relationship with Microsoft
as it leads the industry with very advanced graphics controllers including the
newest SLI (scanline interleave mode) systems that are the ultimate in desktop
computer graphics. The cards cost around $450 each and you need two of them for
the ultimate in performance. Everyone wants them.
What will happen with ATI is that certain characteristics of its Xbox360
controller will be admired by the game developers and they will employ code to
optimize use of these features. This always spills over to the PC side and
suddenly ATI will have a card that specializes in this function or method. The
next thing you know everyone has to have that new card. ATI and Nvidia have
been fighting with each other in this incredibly competitive market for years
now and the results have been remarkable products for end-users and profits for
the companies.
ATI has been lagging behind Nvidia with nothing solid to compete with the
remarkable Nvidia SLI cards. If the Xbox is a massive success, as I predict it
will become, then ATI could be the main beneficiary.
(John Dvorak is a columnist with Marketwatch.)
