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.
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.