Quo vadis, Nvidia?
Have you ever wondered how AMD’s ATI acquisition and the battle for the mainstream customer in the CPU and GPU markets would impact Nvidia? We did and spent some time with the company to learn about how the company perceives its challenges and opportunities in a rapidly changing graphics market. Will Nvidia be squeezed out of the GPU market or grow even stronger than it is today?
Despite preceding rumors, AMD stunned the IT world in July of last year when it announced that it would acquire ATI for $5.4 billion . Today, the merger is completed and AMD is dealing with the aftershocks of the merger. While we know that AMD will leverage the acquisition to develop products that will allow the company to eventually escape the trap of being a just-CPU manufacturer, to better compete with Intel on a platform level and to create unique products that can differentiate it from its rival, the times have changed.
AMD’s stock price is in the dumpster, a cut-throat price war with Intel has erased profit margins in the desktop and 2P server segment, which was once a key market that has brought tons of cash into AMD. Revenue growth apparently only happens in the mobile and 4P+ server market, while AMD suffers margins in the desktop and 2P server mass-markets in order to keep its market shares.
But this battle between AMD and Intel involves another company: Nvidia. The fact that AMD has swallowed ATI and already confirmed that it will expand its chipset business and keep the discrete graphics cards business, indicates that AMD will aggressively go after the mainstream graphics market. We expect to see the heat increasing around the integrated graphics, in a confrontation that potentially could split the low-end and mainstream graphics market between the dominant CPU manufacturers AMD and Intel.
This scenario raises several questions for Nvidia: How will this battle be impacting the graphics market overall? Is Nvidia strong enough to survive two CPU manufacturers that are going after the lion’s share of the graphics market? Will Nvidia end up as an acquisition target? Will it retreat into a niche like Matrox, the once dominant graphics supplier of the mid-90s? Or is there an opportunity for Nvidia to outpace AMD and Intel?
A look at shipment data and the financials of AMD and Nvidia reveals some interesting details that suggest that dramatic shifts in the graphics industry are happening.
Nvidia never has looked stronger in shipments than it has in Q4 of 2006. According to Jon Peddie Research, Nvidia held a 53.8% in the discrete desktop graphics market (31.0% including integrated graphics chipsets (IGCs)) and 59.1% in the discrete mobile graphics segment (22.9% including IGCs.) According to Peddie, ATI only trumps Nvidia in mobile IGCs. Overall, the market research firm estimates Nvidia’s current market share at 28.5% and ATI’s at 23.0%.
On the financial side, AMD’s Q4 revenues were just under $1.8 billion with losses amounting to $574 million (which however, were almost completely a result of acquisition resulted-charges). The company already announced that it will miss its revenue target for Q1 2007, which will mean that AMD may not be able to report a profit. Investors are very cautious these days with the AMD stock, which currently hovers around $13, 32% below the price when the ATI acquisition was announced ($19.10) and 63% below its 52-week high ($35.75). AMD currently has about $1.6 billion in the bank and a market capitalization of about $7.2 billion (at market close on March 27, 2007.)
Nvidia, on the other side, most recently reported record quarter revenues of $820 million with profits of about $107 million. The stock price is currently at about $29, up about 62% from the price on the day of the AMD/ATI merger announcement, but down about 26% from its 52-week high of $38.96. Nvidia has about $741 million in cash available and has a current market capitalization of $10.36 billion (at market close on March 27, 2007.)
Clearly, Nvidia is looking great today. But will it last? What does the AMD/ATI merger mean for Nvidia in the long run?
We were curious to find out more about Nvidia’s view of the situation and sat down with Rob Csongor, vice of corporate marketing at Nvidia.
Join us on the next two pages in a chat about market dynamics, where Nvidia sees growth opportunities, an AMD that suddenly is also a competitor, a new relationship with Intel – and products such as AMD’s Fusion. (Note: Unfortunately, we recorded this interview before Intel’s announcement of a CPU that integrates graphics and aren’t making references to that in this interview.)
"We took the situation serious back then and we take it serious now."
TG Daily: The graphics industry appears to be in the midst of yet another big change and shifts, some of which can be attributed to AMD’s decision to acquire ATI. Are you worried?
Csongor: There are lots of market shifts going on right now. All of which are positive for us. Now you would expect me to say that, but the truth is that now - more than at any previous time - where there has been something going on with Intel, AMD or ATI, the shifts are more favorable to us than they were in the past.
TG Daily: Why would you say these current shifts are better for than Nvidia than previous major shifts, which appear to happen every five years or so?
Csongor: We routinely get questions which ask ‘what happens if your competition develops a new graphics chip, what if they invest in high-end graphics?’ Fundamentally, we now see our relationship with AMD and ATI almost exactly as our relationship with Intel. We cooperate with the CPU business and we compete with the graphics business.
When I joined Nvidia in 1995, some people said that Nvidia was pretty much dead. Why? Because Intel was about to go into the high-end graphics market. I had press meetings just like this one and people said you ‘guys are dead’. We took the situation serious back then and we take it serious now. But there are certain dynamics that are occurring every time.
TG Daily: What are those dynamics you are dealing with?
Csongor: On the very high end - and very, very fortunately for Nvidia - 3D graphics is really hard to do. 3D technology and solving complex visual problems requires a lot more than just science. It’s a tough job and that is why there are not so many players on the high end.
In the mainstream, there are dynamics of integrated graphics and good enough graphics. The reason why we are not dead now is that, of course, the bar keeps rising. We are nowhere near the limits of human perception when it comes to graphics.
The same dynamics that exist now are the same dynamics that existed four years ago. In fact our situation is better than the one four years ago: As an independent graphic supplier - as opposed to being AMD-centric - we have become neutral.
TG Daily: Would you say that the AMD/ATI merger has changed your relationship with Intel?
Csongor: It certainly facilitated more cooperation between Nvidia and Intel. On the AMD side, we already have a good relationship with AMD – and when I say ‘AMD’, I mean the CPU business, which is really the core of AMD. At the end of the day, AMD of course will push ATI graphics, just like they push any other of their businesses. However, at the heart, AMD is a CPU supplier.
TG Daily: Did the AMD/ATI merger hurt the relationship between Nvidia and AMD?
Csongor: No, I do not think that our relationship with AMD was hurt. There is a little bit of an adjustment going on, the same that happened with Intel. Regardless whatever confusion, the CPU guys ultimately will have to do what is right for their CPU business. And the best is to offer an open platform and align yourself with best of breed. If we are best of breed, then AMD will align itself with Nvidia. If we are not, then they won’t.
TG Daily: Will we see more Nvidia-Intel solutions then we have in the past?
Csongor: I can’t talk about unannounced products.
TG Daily: I was not thinking about specific products …
Csongor: Well, we already have announced some Intel products which we did not have in the past. And we are working more with Intel than we have in the past. Right now we are making sure that SLI customers have solutions for both Intel and AMD.
TG Daily: Is there a difference in working with AMD and Intel?
Csongor: Both want to have the CPU of choice. Both now believe that the gaming community is a very enthusiastic, passionate, and verbal audience that is important to win over. With SLI, for example, AMD was always about performance, now look at the [Intel] Core 2 Extreme - it is really all about gaming. At CES, Intel’s booth was about gaming and there were SLI machines with Nvidia chipsets in it. At the end of the day, Intel may still be viewed different, but they want their CPU to be picked, they want to be recognized as the CPU leader, and - as part of that - they have to win the gaming segment.
TG Daily: Looking at your near-term business environment, do you believe that AMD will have more impact on the graphics market than ATI did?
Csongor: We still treat ATI as a graphics supplier out there. We still compete with ATI. In a lot of ways nothing really has changed. However, on the CPU side, for example, gamers still want SLI as a combination of GeForce and nForce. It has become easier for us to offer solutions for both AMD and Intel. I could not have said that four years ago - we have an easier time now as an independent graphics supplier than we had in the past.
"Technology leadership is important to drive the rest of the market."
TG Daily: Let’s look at Nvidia’s products. You have grown from just developing GPUs for performance PCs into a chipset supplier, you recently have acquired a company that will allow a move into portable devices. What would you say is Nvidia’s biggest opportunity right now?
Csongor: We have a huge opportunity in the mainstream market. There is a big change going on in the market. With the arrival of Windows Vista, you now see Dell recommending GPUs for all the new applications that are coming along. They never used to do this before. You will be seeing GPUs in more and more base configurations of PCs - in PCs where GPUs have not been before. That is clearly the biggest opportunity for us right now.
There are other opportunities with integrated graphics, workstation and handhelds, which is stating to take off. You will be seeing Nvidia in more and more phones.
TG Daily: Nvidia in the mainstream? Isn’t this exactly where Intel and AMD will take their battle? Is there room for Nvidia?
Csongor: We have been in a competitive situation with Intel for a long time. We have integrated parts and they were selected over Intel’s and ATI’s integrated parts. There is a variety of reasons why, but nine out of eleven notebooks on the shelves of Best Buy have an Nvidia integrated chipset. In today’s mainstream, DirectX10 and high-end shading is not that much of a priority, but excellent battery life, excellent video quality, gaming and compatibility is big - and we have done well here. Could we have been squeezed out of that market in the past? Yes. But we weren’t.
TG Daily: Is there much to gain from the mainstream? Isn’t good-enough-graphics in the mainstream becoming a commodity that we all expect our PCs to do anyway?
Csongor: Technology leadership is important to drive the rest of the market. For example, look at the growth you are seeing in the notebook side right now: In the past we’ve been in high-end notebooks, now we are the market leader. Why? Because we ended up developing better GPUs than our competition.
The base-line keeps growing, just like the high-end. Graphics can still see huge improvements. Sure, the day on which realistic graphic are just as good as reality will arrive eventually. But we have a long, long way to go to get there.
TG Daily: Besides PC graphics, where should we expect Nvidia products in the future?
Csongor: There’s an awful lot of displays out there. We will be delivering a great experience on all of those displays. We are involved with consumer electronics, we are inside phones, inside gaming machines like the PS3 and video arcades.
TG Daily: On a more long-term view, do you think Nvidia can survive just with graphics solutions?
Csongor: If you start with the basic idea of what Nvidia really is, you see that we are a visual company. This means that wherever there is a LCD, we want to make that panel look better. If you look at all the different displays that exist in the world, I would say that almost all of them are terrible. My phone display is terrible and my car display is terrible. Look at all those different areas where there is a display - there is an enormous opportunity for us to expand that visual focus. We are now going into handhelds, into cars and into everything from airplanes to refrigerators.
TG Daily: What is the role of the chipset at Nvidia?
Csongor: Bringing GeForce to every price point has a lot to do with the core logic business. There’s a lot happening, some of which I can’t talk today about. It is a focus for us and it is fundamental to enabling the solutions we are planning. But I can’t really talk about anything that has not been announced.
TG Daily: There are very persistent rumors out there claiming that Nvidia is developing a CPU. Are you?
Csongor: No. We are not a CPU company. We are focused on visuals. Building a CPU is not our expertise and not our background. If we focus on visuals like we have for the last 12 years, if we focus on solving visual processing problems, we will be ok.
We have two CPU suppliers and we are now in a situation of being neutral with both of them. Our market share increase, by the way, is a result of being neutral. We are driving the bar on the low-end and we are driving the tech leadership on the high-end.
TG Daily: There is a lot of buzz around AMD’s Fusion processor. Do such products make AMD a whole new Intel for you – and essentially a second giant competitor?
Csongor: In terms of a company that has a CPU and a graphics business, you could be calling AMD now another Intel. But AMD guys are still driving the CPU and ATI guys are still driving graphics.
AMD has talked about some long term products such as Fusion. People have asked us what we think about fusion and the honest answer is that we do not know. But it is very unusual for a CPU company to ever talk about anything that is four years out. AMD recently closed the acquisition, and as part of a acquisition you have to verbalize something why you are doing it. You have to justify it other than just picking up the business. They announced that there would be a new product targeting the low end and two months later they said it would be moved out into the next decade.
Are we worried? We are always worried. We were worried ten years ago, four years ago, and we are worried now. If you integrate the GPU and the CPU, on the surface, integration never has meant higher performance or has lower cost and certainly never has meant flexibility. I am assuming that the value proposition of the product would be lower cost. I do not know if integration can solve this problem. It is not a proven strategy.
TG Daily: Assumed that AMD had not bought ATI, would Nvidia haven’t been the better fit, given the close relationship you already had with AMD as well as a customer group that shows a high loyalty?
Csongor: That is a very speculative question: If you are a CPU company and you are bundling the CPU and graphics business to go after Intel, then we are talking about a platform solution. Our focus is being a visual processing company and we want to continue doing that. That would not fit into AMD’s strategy.
TG Daily: On the other side, wouldn’t Nvidia be a nice fit for Intel?
Csongor: We are enjoying being the only independent graphics supplier to the industry. That has some very good, very strong advantages for Nvidia. If we got bought by anybody, that would not allow us to continue doing that.
TG Daily: Thank you for the interview.