Many European customers feel ripped off when they see the US street price of products. On a straight currency conversion $299 US should be close to €299 but it often works out much higher. Can you explain what is happening here.

Sure … I see a lot of queries on this so its good to clarify. First and foremost the all US prices are quoted excluding sales tax (varies from state to state - New Hampshire = 0%) where as here in Europe you have to add VAT which is anywhere between 16% to 25% depending on country. The final thing in the mix is that US retailers work off a smaller profit margin than their European counterparts (this is again due to the higher cost of doing business in Europe) and in Europe we have distributors (and in some regions sub-distributors) who take a small percentage (US major retailers are direct accounts).

So some maths … assume that you want the US street price to be $299 and assume that the retail margin is 20% (the actual number varies from product to product) that means that we sell to them at $239.

Now in Europe we sell at $239 but between slightly higher retail margin + distribution costs we use 25% so the selling price is $319 ex Vat. Now we add VAT and we use 20% as a European average so we get $382 … finally convert to Euro and round up to a price point and voila $299 = €399

Last year you made the call to move production of videocards towards a sub-contractor manufacturer, in this specific case MSI. Will this concept/choice be the same with your near future products ?

Absolutely, apart from the occasional typhoon this model has worked really well.  There are economies of scale these guys can achieve that we could never reach building our own boards. Over the years custom engineering has pretty much disappeared and everyone uses the reference design so really it just comes down to quality, to date MSI have an excellent track record in this regard. In fact quality is paramount for Creative so we go a bit over the top with our testing.

Just to give you an idea here is the quality testing that is done before we ship a new card. First MSI supply samples to both Creative and NVIDIA, Creative does software testing and compatibility and NVIDIA do our hardware qualification. Assuming this goes well the board goes into production with random samples selected off the line for functionality testing. Once they are approved they are shipped to Ireland where we do incoming goods inspection before we accept the goods. Finally we go into production here and once again random samples are taken off the line and tested. I don't believe any other company goes to this level of testing but I think it shows our commitment to delivering a quality solution.

The graphics cards business is an extremely demanding and competitive one with a production cycle of 6 months. Many believe that the product cycle is complete overkill and that the R&D boosts overall costs. If we look at the past then videocards for enthusiast have moved from a 250 USD price range towards 400 USD as we now see with Radeon 9700 Pro and Matrox Parhelia. How do you feel about this and what is you perspective of the videocard market as it is today.

Everything you say above is true .. the intense competition the constant product cycles makes producing chips hugely expensive and the only way to recoup the costs is for NVIDIA to pass it on to the end-user (as an interesting aside the margin that board-makers like Creative makes does not increase as the SRP does it merely reflects NVIDIA passing on a higher chip price). The real question here is do you get value for money and the answer is it depends on who you are. I personally wouldn't spend $400 on a graphics card (I use a Ti4200 and run games at 1024x768) but there are people who want the best and are willing to pay for it. The same is true in every industry, designer clothes, cars, televisions etc. etc. the best by its nature is the most expensive and its up to each individual to decide for themselves.

Looking forward the cost of chip manufacture is only going to continue going up as full programmability becomes standard and right now I don't know where it will end (e.g. Voodoo 6000 would have been $599 and lots of people wanted one of them). At some point though the return on investment will become so small that there will be little point developing chips for these high price points and the battle will be in the volume market where price performance is the key (usually around $199)

Anything you like to add to this interview ?

Yeah .. just to say thanks a lot for the opportunity to give you an update on Creative's business. I really appreciate the opportunity to get direct feedback from the user base as ultimately we are servicing your requirements. It absolutely should not be the case that we are developing products and trying to persuade people to buy them. Rather it’s the gamers that should tell us what they want and that should be the basis for our product launches … I think some companies have forgotten this very important fact.

Eoin, many thanks for this interview. We know each other for quite a while now and have had some nice discussions. I know I speak for the audience when I say that you always are open and honest in your answers and this interview once again reflects that.

Cheers,

Hilbert

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