The Motorola Acquisition: What Google Should Learn From 3DFX Interactive

 |  Includes: GOOG, NVDA
by: Doug Poretz

3dfx Interactive was based in San Jose, and in the mid-1990s became, without question, the pioneer and the leader in the development, manufacturing and sale of 3D graphics processing units. Just take a look at the Wikipedia article about them and you will see a listing of new product after new product, innovation after innovation. The company prospered by selling their graphics processing units as an OEM to graphics cards companies -- not unlike the way Google (NASDAQ:GOOG) has sold their Android operating system to cell phone companies.

Then 3dfx announced its acquisition of STB Systems, a Texas-based graphics board manufacturer, in a $141 million stock swap completed in early 1999. It's worth taking a look at the statements included in the release announcing the acquisition:

  • "3dfx will now be able to sell branded add-in boards to retail customers and PC vendors. The merged firm will more directly face rivals [and then 3dfx customers] such as Diamond Multimedia Systems and Creative Labs. 3dfx expects to withhold its Voodoo3 chip from those companies and instead sell the chip in its own boards."
  • " 'This shift in our business model allows [us] to control our own destiny,' said Greg Ballard, president and chief executive officer of 3dfx, in a prepared statement."
  • " 'We believe that the combined strengths of STB and 3dfx will enable us to deliver a more powerful and focused brand strategy and singular vision for our products and customers,' said William Ogle, STB's president."

In fact, what 3dfx did was go into competition with its own customers. The rest of the story became foreordained: 3dfx had trouble creating, then producing and then selling its own cards, which caused delays in the delivery of its graphics processing units to its OEM customers who were already mad at 3dfx for going into competition with them. At the same time, 3dfx could go after no new OEM accounts because who would buy from a supplier who was also a competitor and acknowledged that they would withhold new innovations from their customers? So, what did the 3dfx customers do? They went to what was at that time a far second to 3dfx, Nvidia (NASDAQ:NVDA), which ended-up buying 3dfx's assets, including their technology/IP, at give-away prices as 3dfx shut their doors and turned out the lights.

Google says they want Motorola Mobility (NYSE:MMI) for their 17,000 patents and 7,000 pending patents. It says that Motorola Mobility will continue to operate as a separate company, meaning Motorola phones will compete for customers against other cell phone manufacturers using Google's Android platform. The execs at Google would be well-advised to read-up on the 3dfx story to make certain they do not repeat similar mistakes. Although much smaller than Google, the fall from unquestioned leadership to the out-of-business sign for 3dfx was remarkably short and steep.

Disclosure: 3dfx retained me as an Investor Relations advisor as its fortunes started to crumble. In the final months, it tried pulling rabbits out of the hat, including the purchase of a start-up company for a monstrous amount (about $1 billion as I recall) because that company stood a good chance of winning the XBox business, which it didn't -- it went to Nvidia. At a certain point, the destiny was so clear, an IR program made no sense and I and 3dfx ended our relationship.

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.