Nvidia's transformation in the past three years has not been asradical as Nokia's, but needs to be understood better. It is also atransformation that is not yet over. Nvidia is three years into atransformation that will take another three years to complete. So youcan 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 graphicscompany. Traditionally duking it out against AMD ( AMD), Nvidia is a leadingsupplier of graphics cards for both PC OEMs as well as the hobbyistcustom after-market. The past couple of years have seen an important addition to thistraditional Nvidia graphics market, and that's the industrial market.All sorts of companies are using Nvidia's GPUs for computing-intensivetasks. Think "trains, planes and automobiles" -- a common use casefor 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 GPUmarket from "one GPU in every PC" to a cloud-based model.
The way to start thinking about why this is happening is by way ofanalogy: At various stages over the past 15 or so years, computingtasks have moved from the local processor to the cloud. It startedwith web-based email, such as Yahoo ( YHOO), taking on Microsoft Outlook, andthen 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 mostexpensive hardware for each and every person, you can "rent" sharedserver 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 hotelroom. It's far more economical.
Third, Nvidia is partnering with the leading server virtualizationsoftware companies: VMware ( VMW), Citrix ( CTXS) and Microsoft. They will bereselling Nvidia's solution starting this year. Basically, all the largest and most relevant vendors are endorsingNvidia's solution as the "hardware as a service" solution for heavyindustrial GPU computing. I doubt HP, Dell, IBM, Microsoft, Citrixand 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 thecloud and delivering the experience as a service to a simpler processin a less expensive end-user device. You're already using web-basedemail and productivity such as Google Docs, so why not also games? Why is this "hardware as a service" Nvidia strategy important? Whyshould we care? Ultimately, it's about the network making the serviceavailable to more people, at lower cost. Instead of outfitting bigPCs with power-hungry Intel and AMD processors, we human beings reallyonly need to be looking at a rich display in front of our faces. Thiscould be so much cheaper if the device is as close as possible tobeing only a display with network connectivity, as opposed to anentire Intel computer glued to the display. What this means is that Nvidia is now bringing supercomputercapability on a "cloud rental" basis to smaller and smaller companies.It's almost like the web-hosting business enabling start-ups such asSalesforce to quickly build up a business to compete with Oracle andSAP. I almost apologize for sounding lyric about this, thinking aboutJoseph Schumpeter's "gale of creative destruction" of capitalism, newbusiness models rendering the old ones obsolete.