ATI doesn't need to outperform 8800GT and that they've gotten as close as they have bodes well for them. ATI right now is looking to the mid-range and lower-end market which is where they are really starting to beat Nvidia, in the meantime they are also working on R700 which should hopefully regain the performance crown for them.
ATI is headed in the right direction in more ways than Nvidia is right now actually..let me explain. The computer market is headed towards not just greater performance, but greater performance per watt and is moving towards increasingly inexpensive components. In this way DAAMIT has everything well under control.
Where are they generally focusing their resources right now? In the mid-range and low-end price points and thats where they can really shine. If they really commit to energy efficiency and inexpensive component prices then they will stand to sweep the floor when the tipping point is finally reached..and every indication is that its getting closer.
So by undercutting Intel/Nvidia and working to improve efficiency and cost to performance they are helping themselves out immensely, even if that means financial pains in the meantime.
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