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Introduction

Finally the Nvidia (NASDAQ:NVDA) Shield is on sale. After months of hype and a last minute delay, consumers can finally get their hands on Shield.

For anyone who does not already know, Shield is a handheld Android based gaming console. It is also the first device to ship to consumers that is powered by Nvidia's much anticipated Tegra 4 processor.

Reviews of the Shield thus far have been generally positive. Reviewers have been impressed by the performance of the device. The biggest positives have been gaming performance, build quality, and battery life. The main negatives have been about developer support for controller inputs, something Nvidia cannot control.

Many have been skeptical about the prospects of Shield. They claim the $299 price tag will scare away consumers and sales will flop completely. When Nvidia announced the Shield the stock price actually fell. Investors were concerned Nvidia was not focusing on its core business and was wasting time and money on a project that would lose money. However, at its investors conference in the spring Nvidia revealed that the development cost of Shield was just $10 million.

The aim of this article is to analyze whether Shield will make up its development cost and if it can earn a profit for Nvidia.

Whenever a major new phone is released it gets torn down to see the components inside. A cost analysis often goes along with this tear down. A full cost analysis of the parts in the Shield has yet to appear online. However, we can make a relatively accurate estimate of the manufacturing cost of the Shield by comparing it to the cost of similar components that appear in popular phones.

Most of the components have easily comparable counterparts with well-known costs.

Shield Manufacturing Costs

System

Component

Cost

Memory

16 GB Storage -- 2 GB DDR3 Ram

$28

Display

5" 1280x720 Multitouch LCD

$65

Processor

Nvidia Tegra 4 1.9 GHz

$25

WLAN, etc.

2x2 MIMO WiFi, Bluetooth 3.0, GPS

$9

Sensors

3 axis Accelerometer, 3 axis Gyroscope

$13

Power Management

PMIC

$8

Battery

7350mAh

$16

Controls and Case

Joysticks, D-Pad, triggers, bumpers, buttons

$30

Packaging

$6

Assembly

$10

Total

$210

Remember that these are just my estimates based on the cost of similar components, a full professional breakdown could reveal different costs. I will provide logic behind my estimates. Costs used for comparison can be found here.

The most important component that is unique to Shield is the Tegra 4 processor. If the device is competitively priced it will likely be more expensive than the Snapdragon 600 but less expensive than Samsung's Exynos Octa eight core processor. I would estimate a chip cost of approximately $25.

The display is a 720p LCD. I therefore used the price of the 720p screen of the Galaxy S3. LCD's are traditionally less expensive than amoled displays so the Shield's display is likely cheaper but we will use this value to be conservative.

For the battery price I calculated the cost per mAh of the battery in the Galaxy S4 and multiplied that by the 7350 mAh capacity of the Shield. This cost is also likely conservative because of less stringent space constraints inside the Shield compared to inside a smartphone.

Finally for the cost of the controls and casing I added the cost of an Xbox 360 controller when ordered in bulk (~$18) and approximately half the cost of the mechanicals of the Galaxy S4. These two values correspond to the bottom and top halves of the Shield. This is probably the most flexible of my estimates, but I again believe it is reasonable and conservative.

Sales

The Nvidia Shield sells for $299. With a manufacturing cost of ~$210, Nvidia likely still sees a profit of ~$50-70 on every Shield unit after transportation costs and seller fees. The Shield is currently sold out on Newegg and is not available online from Gamestop.

If we assume a profit of $60 per unit, it would take sales of only 167,000 to make up the development cost of the Shield.

On May 18, the year-to-date sales of handheld game consoles totaled just over 12 million units between the Nintendo DS, Nintendo 3DS, Sony PS Vita, and the Sony PSP. If Nvidia is able to capture just 1% of the handheld console market it will make up its development cost in about 7 months. Remember year to date does not include the holiday season when sales are up significantly.

Impact

This all translates into Shield being a profitable product for Nvidia. This, however, is not the biggest impact of Shield on Nvidia's business. The impact of Shield is much more long term and indirect. Shield provides a platform to show off the Tegra 4 and prove its performance capabilities. It is also an incentive for developers to create Tegra exclusive or Tegra enhanced games that will further push Tegra sales and the adoption of Tegra processors by phone and tablet manufacturers.

Conclusion

I believe that while Shield will probably not capture a significant portion of the gaming market it will still be profitable for Nvidia and will indirectly create significant long-term value for the company.

Source: The Business Case For Nvidia Shield