According to the technology news site Fudzilla, Nvidia (NASDAQ:NVDA) sacrificed the game console deals to concentrate resources on the smartphone/tablet push. According to the site, Nvidia's decision was deliberate and dates back a few years. The rationale was that from a long-term growth perspective, the mobile chip focus is just a better financial bet than building an integrated console part. In this article, I give my views on why this decision made sense for Nvidia, and why AMD was probably better suited to land the console gig anyway.
The Opportunity For Consoles Versus Smartphones/Tablets
The Microsoft (NASDAQ:MSFT) Xbox 360 sold about 78 million units during its run from November 2005 to February 2013. The Sony (NYSE:SNE) Playstation 3, in comparison, to about 77 million from November 2006 to January 2013. So over about 6-7 years, this is a 150 million unit opportunity, or roughly 25 million units per year (the distribution of sales over time is not uniform). Assume an ASP of ~$60 at 40% gross margin (above corporate average), and you're looking at roughly $1.5B/year in sales and $600M/year in gross profit.
Now, this assumes of course that AMD is selling the console vendors the chips outright rather than simply licensing IP, which has traditionally been the case for the consoles. I suspect that AMD is actually selling the chips simply because of the patent cross licensing agreement with Intel (NASDAQ:INTC), but we will know in the fullness of time. For the moment, let's assume the best case that AMD is actually selling the chips directly.
Now, let's look at smartphones. Over 700 million phones were shipped in 2012, with 1.16 billion phones expected to be shipped by 2016. This is a pretty huge opportunity, but not all of it is available to Nvidia, and even so, there are a lot of players in this area. So let's assume conservatively that Nvidia captures 5% of the smartphone space per year after "Grey" (integrated apps processor + modem) launches. This means ~35M units in 2014.
Next, let's look at tablets. Nvidia's position in tablets is actually quite strong with ~17% of the tablet market as of the last read (Apple is the big kahuna with 53%). I expect as Android tablets take share from Apple's (NASDAQ:AAPL) iPad line, and further as the market sees growth from 130M units in 2012 to 180 million in 2013, this could represent a 31M+ unit opportunity in 2013 and even higher in 2014.
So we're looking at a starting point of ~60M units in 2014 with ASPs hovering around in the $20 - $30 range (let's call it $25) at 50% gross margins (below corporate average). We're looking at a 2014 revenue baseline of $1.5B with gross profits of $750M with potentially significant revenue acceleration.
Did Nvidia Make The Right Decision?
I think so. While Nvidia probably could have turned Tegra 4 into a "console-level" APU with the ARM (NASDAQ:ARMH) Cortex A15 core + more GPU cores, there is significant software legwork that needs to be done to support that. I also bet that game developers were happier to work on X86 (which helps cross platform titles for the PC) than on ARM or PowerPC, so that was another big "win" for AMD's solution.
The big growth area is smartphones and tablets, and that's where Nvidia's resources need to be. AMD's products are already very well suited for consoles and quite frankly, they were probably much more "in need" of it than Nvidia was, so it probably offered the console folks a nice deal.
The only question that remains is whether Nvidia will be able to fight the game industry's "standardization" on AMD graphics hardware with its traditionally very strong developer relations to keep its leadership position in notebook/desktop gaming GPUs? I think that this won't be a problem, but definitely keep an eye out for any clues to the contrary if you follow this industry or invest in either AMD or Nvidia.
Additional disclosure: I am short ARMH