Nvidia Is to Intel What Salesforce Is to Oracle

NEW YORK ( TheStreet) -- Many companies change over time, and therefore warrant a fresh look.

When I was a little boy during the Cold War, Nokia's ( NOK) product was studded winter tires. The company reinvented itself to become the world's leading cellular-phone maker, then collapsed under competitive pressure from BlackBerry ( BBRY), Apple ( AAPL) and Google ( GOOG), and has now ended up being Microsoft's ( MSFT) de-facto handset hardware arm.

Nvidia's transformation in the past three years has not been as radical as Nokia's, but needs to be understood better. It is also a transformation that is not yet over. Nvidia is three years into a transformation that will take another three years to complete. So you can view this write-up as a half-time report, if you will.

Nvidia has two basic business segments:

1. Graphics processors for PCs.

Most computer enthusiasts know Nvidia as the PC gaming graphics company. Traditionally duking it out against AMD ( AMD), Nvidia is a leading supplier of graphics cards for both PC OEMs as well as the hobbyist custom after-market.

The past couple of years have seen an important addition to this traditional Nvidia graphics market, and that's the industrial market. All sorts of companies are using Nvidia's GPUs for computing-intensive tasks. Think "trains, planes and automobiles" -- a common use case for Nvidia's GPUs is for complex product design and engineering.

On its own, this market is already growing at a very healthy rate. However, 2013 will start the transformation of the industrial GPU market from "one GPU in every PC" to a cloud-based model.

The way to start thinking about why this is happening is by way of analogy: At various stages over the past 15 or so years, computing tasks have moved from the local processor to the cloud. It started with web-based email, such as Yahoo ( YHOO), taking on Microsoft Outlook, and then Google Docs took on Microsoft Office. Salesforce.com ( CRM) took on Oracle ( ORCL) and SAP ( SAP).

These are all the same thing, in principle: Instead of buying the most expensive hardware for each and every person, you can "rent" shared server space in a remote location. When you go on vacation or travel, you don't build a new house to sleep every night -- you rent a hotel room. It's far more economical.

Salesforce.com would call this "software as a service" (SaaS). Nvidia is now taking this concept to the industrial GPU market, and it might be called "hardware as a service."

In order to attack this market, Nvidia is using multiple overlapping strategies:

First, Nvidia building its own cloud GPU appliance, which is sold in two base configurations -- $25,000 and $40,000, plus an annual license fee starting at $2,500.

Second, Nvidia is partnering with the leading server hardware companies: HP ( HP), Dell ( DELL) and IBM ( IBM). They will be reselling Nvidia's solution starting this year.

Third, Nvidia is partnering with the leading server virtualization software companies: VMware ( VMW), Citrix ( CTXS) and Microsoft. They will be reselling Nvidia's solution starting this year.

Basically, all the largest and most relevant vendors are endorsing Nvidia's solution as the "hardware as a service" solution for heavy industrial GPU computing. I doubt HP, Dell, IBM, Microsoft, Citrix and VMware are doing this because their sales expectations are modest.

On the consumer gaming side, we should see an analogous development, Nvidia expanding the gaming market by processing the games in the cloud and delivering the experience as a service to a simpler process in a less expensive end-user device. You're already using web-based email and productivity such as Google Docs, so why not also games?

Why is this "hardware as a service" Nvidia strategy important? Why should we care? Ultimately, it's about the network making the service available to more people, at lower cost. Instead of outfitting big PCs with power-hungry Intel and AMD processors, we human beings really only need to be looking at a rich display in front of our faces. This could be so much cheaper if the device is as close as possible to being only a display with network connectivity, as opposed to an entire Intel computer glued to the display.

What this means is that Nvidia is now bringing supercomputer capability on a "cloud rental" basis to smaller and smaller companies. It's almost like the web-hosting business enabling start-ups such as Salesforce to quickly build up a business to compete with Oracle and SAP. I almost apologize for sounding lyric about this, thinking about Joseph Schumpeter's "gale of creative destruction" of capitalism, new business models rendering the old ones obsolete.

And in this case, Nvidia is driving such a crest of "creative destruction" forward against the Intels of this world, starting right now and for the next three years.

2. The Tegra mobile processors.

The second, and thus far smaller part of Nvidia's business, is a lot tougher than the industrial graphics processor business. It's also a larger market, with a potential to sell over a billion units per year.

The dominant incumbent in this space is Qualcomm ( QCOM). It rose to this position by leveraging its dominant position in cellular modems into executing a new mobile CPU platform very well.

Two of the industry's leading players -- Apple and Samsung -- make their own CPUs, but also pair them with Qualcomm's stand-alone cellular modems. Nvidia certainly has its work cut out for itself here, and victory is by no means certain.

Nvidia's challenge right now is to do the opposite of what Qualcomm did in the past few years: Add a competitive cellular modem to its CPU/GPU. This may have been an almost-impossible task only a couple of years ago, but an opening has now presented itself in the marketplace for Nvidia: LTE on lower frequencies.

The industry is now standardizing on LTE, and more lower frequencies, such as 700 MHz in the U.S., have now been made available. This means Qualcomm's expertise in legacy technologies used by companies such as Verizon ( VZ) and Sprint ( S), is disappearing in importance.

Obviously, Qualcomm will continue to be a leading vendor in the new low-frequency LTE world as well, but over the next year or two pricing should collapse, and probably margins too -- for Qualcomm. Essentially, the Qualcomm monopoly will be no more, starting this year.

Just like Qualcomm executed so well in adding its Snapdragon CPU to its cellular modem, Nvidia must now execute similarly well in adding a cellular modem to its Tegra CPU. Over the past three years, Nvidia has stumbled many times in just making its Tegra CPU competitive, and the cellular modem is arguably an even bigger challenge. There is no shortage of legitimate doubts as to whether Nvidia will be able to pull this off.

In addition, other new competitors are also using the same opening to enter this market: Broadcom ( BRCM) and Intel ( INTC) are the most prominent.

The good news for Nvidia's Tegra opportunity is that it's so large. Even if Nvidia fails to dethrone Qualcomm, and even if Intel and Broadcom match or overtake Nvidia's Tegra, this could still be a thriving business with a No. 4 market position, and right now Nvidia is gunning for the No. 2 position.

Icing on the cake: Nvidia's SHIELD gaming device.

Marrying the two sides of Nvidia's business is the SHIELD gaming device, which should go on sale in late June for somewhere under $500. It marries a gaming-optimized Android handset, with the possibility to connect to Nvidia's future cloud-gaming services. It already looks to become an iconic product in the gaming community.

Bottom line: Is Nvidia to Intel what Salesforce.com is to Oracle? Will the cloud take over powerful computing? If the answer to this question is yes, Nvidia may be in the catbird seat as it completes its transformation over the next three years.

-- Written by Anton Wahlman in Palo Alto, Calif.

At the time of publication, the author was long AAPL, GOOG, QCOM, NVDA, INTC and BRCM, and short MSFT and AMD.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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