ATI's Moment of Glory
TEN MINUTES AFTER THE MARKET OPENED THURSDAY, ATI Technologies became the world's largest computer graphics company...the stock market's measure, at any rate. Investors thrilled at news that the Canadian chipmaker would supply the graphics technology for Microsoft's next generation Xbox gaming console. ATI shares briefly popped up 12%, to 13.81, valuing the Markham, Ontario, firm at $3 billion. That exceeded the $2.8 billion valuation of Nvidia, the current Xbox graphics supplier and ATI's bitter rival. By week's end, ATI shares were 13.17 and Nvidia's were 16.15.
Rumors of the Xbox win have helped ATI shares more than double in recent months, while shares of Nvidia have dropped by about half. That's narrowed the hefty premium investors had been paying for Nvidia's predicted earnings, in comparison with ATI's (see "A Graphics Shoot-Em-Up," July 7).
While ATI will recognize some engineering payments from Microsoft in its current September quarter, neither firm's financials will show much immediate impact. Sales of Xbox chips are a material part of Nvidia revenue -- 19% in the recent July quarter. But the Xbox's successor isn't due for a couple of years and Nvidia spokesman Derek Perez says that his company isn't changing any financial guidance.
ATI and its fans say the Microsoft deal shows that ATI has ousted Nvidia as the performance leader of the graphics business. "This agreement cements ATI's position as the prime graphics supplier for the future of the games industry," crowed chief executive K.Y. Ho in the press release.
Power Supply: The blackout across wide stretches of the U.S. and Canada didn't stop the Nasdaq Composite from gaining 3.5% for the week, to close at 1,702. Tech stocks have surged so powerfully in recent months that Credit Suisse First Boston downgraded the entire group last week, from "overweight" to "neutral."
That boast overlooks the commanding lead that Sony and its PlayStation2 enjoy in the electronic gaming business. Sony continues to develop its own graphics technology, even if ATI will be supplying graphics wizardry for future Xboxes from Microsoft and for GameCubes from Nintendo. The $8 billion worth of revenue that Sony pulled in from the PlayStation last year amounted to 12% of the company's total revenue. But the gaming products kicked in 57% of Sony's operating profit.
The next generation PlayStation, due in 2005 or 2006, will step up Sony's offensive to dominate home entertainment, and perhaps, home computing. A patent granted to Sony in February (U.S. patent number 6,526,491) suggests that future PlayStations could be multiprocessing monsters. The patent humbly aims to redesign the Internet and all the computers attached to it, replacing them with a grid of identical processor modules. Handheld devices might have just one of these processing modules, while a network server computer would have a bunch. When needed, these modules could band together -- even across a network -- to crunch through particularly heavy computing jobs. Important stuff, like a 3-D war game.
An overwhelming installed base of computers stands in Sony's way. But maybe a world change starts at the doorstep. Networked Sony devices around a home could implement Sony's multiprocessing vision, with souped-up PlayStations participating in the computing power grid.
Can ATI help Microsoft battle Sony's plan for an army of graphics processing power? Yes, says ATI financial chief Terry Nickerson. ATI's graphics savvy could make the "Xbox Next" into a platform that attracts