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Author: ccchip Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46372  
Subject: Ballard Interview Date: 8/18/1998 11:24 PM
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Below is the interview with Ballard by Wall Street Corporate Reporter which I copied from Bloomberg:

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT
BE IN ITS FINAL FORM AND MAY BE UPDATED.

Mr. L. Gregory Ballard

"What makes me valuable is a little different from the average CEO at a
graphics semiconductor company and that is my unfamiliarity with the
world of semiconductor technology until joining the company 18 months
ago. My background was actually in the software side of the business and
more particularly the entertainment software. In the past, my background
spanned cable programming and more recently video games as head of one
of the larger video game companies in the United States. The reason the
board of directors decided to hire me was that they wanted somebody who
had the perspective of an entertainment marketing person to create in
3Dfx (Company: 3Dfx Interactive Incorporated; Ticker: TDFX; URL:
http://www.3dfx.com) a strategy different from the strategy pursued by
graphics companies.

"In the past, most companies in technology have focused solely on
technology to create a faster chip with a better price performance. Our
focus has been on technology, and we have done a very good job at being
a leader in technology. In addition, we have fashioned a very high
profile brand image for the company, a direct relationship with
consumers and a unique set of relationships with the content providers
to ensure that our technology is the target for their efforts. In
Silicon Valley, they have become so used to business-to-business
relationships that they have forgotten that the ultimate consumer of
these products is a relatively unsophisticated consumer when it comes to
bits and bytes, but a very sophisticated consumer when it comes to
discerning on brand. At this company, we have the technology that
impresses the product manager at a computer company combined with the
brand image that is going to reassure a consumer that they are buying
the best in the entertainment experience."

3Dfx Interactive, Inc.

"3Dfx makes high-performance 3D chipsets, software and technology for
the interactive electronic entertainment market. The Voodoo( family of
3D accelerator chipsets can be found on 3D graphics add-in cards from
some of the industry's leading manufacturers including Diamond
Multimedia, Creative Labs and Intergraph. Anyone who plays games on a
computer or in an arcade will tell you that 2D just doesn't cut it
anymore. People want to immerse themselves in the game experience. They
want games that look good and that move and that lets them feel like
they are there - on the ice rink, in the jungle, or on the battlefield.
Increasingly, the product that people turn to when they want a true 3D
experience is a chip from 3Dfx Interactive."

Incredibly fast 3D images

"In a classic silicon sense, we have created a chip that allows the
computer to display incredibly fast 3D images to display games at a
level that is now ten times the quality and performance that you are
able to see in a Nintendo (Company: Nintendo Company Limited; Ticker:
NTDOY; URL: N/A) 64 or Sony (Company: Sony Corporation ; Ticker: SNE ;
URL: http://www.sony.co.ip) Playstation. In addition to creating that
technology, we make sure that the game developers are producing games
that use this technology. In that way when somebody buys a chip from
3Dfx, whether they get it on an add-in board or directly from a computer
manufacturer, they are buying entertainment and not simply a
semiconductor silicon chip. A wealth of titles will be available by the
fourth quarter of this year, and we guarantee that those titles will run
best on our technology. The chip on a board at retail right now is a
little over $200 U.S., and we expect that price to come down over the
course of the holiday. When the chip was first introduced, the boards on
which they were installed sold for $299 U.S. at retail, but we believe
it will be priced at $199 U.S. for the holiday season."

Only safe bet is 3Dfx

"There are other people in the market who sell chips that have good
performance, but not as good as us. The difference is that they do not
play some of the leading titles that have been developed by leading
companies. A great example of that is the title 'Unreal' which was
produced by a leading edge company who we worked very closely with to
make sure our hardware was central to their software strategy. If you
take that game right now and play it on the equipment of any of our
leading competitors, the game literally does not run; and that is the
second most popular game in the world right now! The third most popular
game called 'Final Fantasy VII' plays on many people's boards, but it
does not play on our leading competitor's boards in video because of
certain architectural issues. We are the only chip set that can
guarantee it is going to play virtually all of the games in the
marketplace. If somebody wants to play games, which after all is the
only reason that you need 3D in your computer, the only safe bet is
3Dfx. The good news is that you also get the highest performance chip in
the market."

Growth strategy

"3Dfx has relationships with virtually every major publisher, including
most prominently, Electronic Arts, who is the giant of the industry. We
have a formal strategic alliance with them where we are the accelerator
of choice for all of their development activities, and engage in
extensive cross-promotions with them. In addition, we have similar
alliances, although not as formal, with companies including Sony,
Activision (Company: Activision Inc ; Ticker: ACTI ; URL:
http://www.activision.com) and Eidos (Company: Eidos plc; Ticker:
EIDSY; URL: http://www.eidosinteractive.com/corporate.html) . We have
been busy working to develop those relationships and that is one of the
reasons that I am here as opposed to somebody from one of the Silicon
companies in the Valley. I have been working with those people for ten
years and already have the relationships that enable those relationships
to work."

Overseas focused in Europe

"Right now about 50% of our business is overseas. Most of that is
focused in Europe because in Asia most games are actually played on
consoles. However, even in Japan there is an increased interest in 3D
acceleration for PCs. We are very much an international company, and
very much focused on making sure that we are the leading company in each
market. In fact we recently opened a European office to ensure that our
presence in Europe is getting the same attention as the U.S. market."

Cultural divide

"There is no language issue at all. In Japan, they have grown used to
Nintendo, and so even Sega had a hard time selling in the Japanese
market. That is because the Japanese market was dominated by Nintendo
for game play. Now PCs have become a more prevalent in Japan, but the
games that play on PCs are different from the games that they have grown
used to playing on Nintendo. Japan is the one place that we see a real
cultural divide as they have not adopted the American cultural norm, and
simply do not like the games that we play. Since that is most of what is
available to the PC, there has not been wide spread adoption of PC
gaming in Japan. We expect that to change over time, but expect Japan to
be one of the more resistant markets.

"Our focus is not on making games - we leave that to software publishers

who are better at that. I suspect that if the Japanese market shows some
promise, companies such as Sierra will penetrate that market. We
certainly hope that happens because our hardware sales will increase.
Our software is what makes the computer's hardware run - it is not
entertainment software. What we put inside the computer is the hardware
that makes 3D and interactivity happen. We then have software that we
put on top of that hardware to communicate and interconnect with the
entertainment software that an Electronic Arts might develop. That
interface between hardware and entertainment software is typically
called an API. What we do is provide an API and not the actual
entertainment software."

The year 2000, and beyond

"The market's potential is enormous, and there are estimates that there
could be as many as 110 million computers shipped by the year 2000. We
believe that virtually every one of those computers will have 3D
technology in it, and we will play in the upper 60% of that market. That
would be 60 to 70 million units in the year 2000, and we hope to have a
significant share of that. This is already a sizable business, but we
believe it could become even more sizable very quickly over the next
couple of years. Right now, there are only two competitors that we spend
much time talking about internally. One is a small privately held
company called Nvidia that has very strong technology, and the other
company is called S3 (Company: S3 Incorporated; Ticker: SIII; URL:
http://www.s3.com). S3 was a former leader in this industry whose
revenues have faded, however they have new technology and are now 'back
in the hunt'. I believe that 3Dfx and those two companies are going to
divide the lion's share of that 60 million units."

Other uses for 3D

"The 3D technology is already being used in applications other than
games on the Internet where people use 3D for web applications. Very
soon, I can see 3D technology being used in business applications where
you will see graphs, presentations and different effects in 3D and
PowerPoint. Once that begins to happen, 3D will become pervasive in
corporate presentations. In the future I believe that 3D will become an
important part of business computers as well as consumer computers."

Achieving leadership in the market

"To achieve leadership in the market we talk to people in the media such

as The Wall Street Corporate Reporter, who spread the word. We also
advertise in key gaming magazines, and increasingly in lifestyle
magazines. In the fourth quarter, you will see a campaign in many of the
PC magazines as we develop our newest product called Voodoo Banshee(,
which is a traditional Windows accelerator product. We have 'raised a
few eyebrows' by doing direct consumer branding advertising, which
nobody else has ever done in this business before, and will continue to
do that in the future. Additionally most of our advertising will be done
in the U.S. with a strong second place in Europe."

Canada and Mexico

"Mexico is not a big market for our products right now mainly because of

low income levels and PC penetration in Mexico lags most of the more
developed countries. Canada is actually pretty interesting because it
has an active installed base of PCs."

Working capital

"3Dfx went public in June of 1997, and completed a secondary offering in

March of this year. We now have $95 million U.S. in the bank, and that
is certainly adequate to meet all of our working capital needs through
the foreseeable future. The only issue is any acquisitions that we may
do down the line. We do not have a target set of acquisitions in mind
and tend to look opportunistically at deals as they are offered to us.
We are a self-contained company, and do not want to suddenly get into
the modem or DVD business. It is not clear that we can go outside our
company and buy technology that will help us in our base business. It is
possible that we may make some acquisitions over time, but it is not
clear to me exactly where they would be."

Finding employees

"An issue for us six months ago was the fact that we were having a hard
time hiring qualified people fast enough. We then became a very 'hot'
company in the Valley. At the same time the number of companies who were
exiting our business increased dramatically, and so more engineers
became available. Those two factors have helped us become very
successful in hiring people."

Management's stake

"Management has a substantial stake in the business, and that keeps our
attention focused on the bottom line in a big way. Over the last couple
of quarters, we had some insiders take liquidity in the market, but
their holdings were vastly larger than the small amounts than they
actually sold. The insiders maintain a very high position in the
company, and continue to believe in its fundamentals. We are very much
tied to the profitability of the future and believe that this business
will continue to grow and excel. Our basic strategy from the very
beginning was to create a very strong retail based franchise for our
accelerators and then to leverage that position in terms of brand and
technology into the OEMs. We have clearly dominated in the retail side.
The big question as we approach the end of 1998 is if we will be
successful in leveraging that position into the OEM marketplace, and our
resounding answer to that is yes!"

3D chipsets, software and technology

For interactive electronic entertainment

"We are the only chip set that can guarantee it is going to play
virtually all of the games in the marketplace. If somebody wants to play
games, which after all is the only reason that you need 3D in your
computer, the only safe bet is 3Dfx."

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