Here’s why Nvidia’s aggressive sales tactics are in the DOJ’s crosshairs

Shares of Nvidia have fallen about 18 percent since Aug. 19, with most of the damage coming after a 9.5 percent drop on Tuesday that erased a record $279 billion in market capitalization.

On the heels of a dark trading day for Nvidia, Bloomberg reported that the US Department of Justice (DOJ) has stepped up its antitrust investigation against the company. DOJ officials sent a subpoena to Nvidia and other companies involved, which includes “legally binding requests that compel recipients to provide information,” according to the anonymous source. Bloomberg sources familiar with the problem. Subpoenas often precede the filing of a formal complaint against a company under investigation.

DOJ officials have expressed concern that Nvidia is making it difficult for its customers to switch to new vendors and penalizing those who do not exclusively use its AI chips, according to Bloomberghis sources. The DOJ investigation into Nvidia began in July, information first reported after similar allegations from competitors about Nvidia’s pricing strategies.

In a statement to wealthNvidia said it “earns on merit” and customers are free to choose the solution that suits them best, adding that the company “scrupulously” complies with all laws.

“We checked with the US Department of Justice and were not subpoenaed. However, we are happy to answer any questions regulators may have about our business,” a representative added.

However, the tech world’s problems with Nvidia’s tactics certainly seem to be widespread.

“All of Nvidia’s competitors have complained to me. I won’t name them, but you can imagine who they might be,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, a technology analyst and consulting firm. wealth.

“Nvidia customers they don’t have they talked about any of those tactics, but they talked about wanting to have — what words did they use — a ‘more balanced supply chain,'” he added.

Nvidia’s April acquisition of RunAI, which provides AI computing software, is also under the DOJ’s microscope, according to Bloomberghis report. There are concerns that the acquisition will further strengthen Nvidia’s control over the entire AI chip supply chain, making it more difficult for its customers to switch to competitors’ products.

Overall, Moorhead believes this could end up being “a very serious investigation” for Nvidia that could slightly slow its business, force the company to open up some of its software platform for use by competitors, or, ultimately, it could result in a significant fine. .

“The reason I say that is, first of all, technically Nvidia is a monopoly. Second, artificial intelligence is very important to society, economy and business today and in the future. So it’s a super hot button (issue). And that means regulators are super motivated to do something,” he warned.

So is Nvidia a monopoly?

Nvidia controls about 90% of the AI-critical next-generation chip market and has made great strides toward vertical integration in recent years, branding itself not just a chip company but an “AI platform enterprise.”

Impressive market share gains and suite of AI software and hardware offerings have made Nvidia a monopoly in the view of many experts, but the DOJ will have to prove more than that.

“It’s not illegal to be a monopoly. It’s illegal — if you’re a monopoly — to remove competition and harm consumers,” Moorhead noted.

Tying agreements, where a seller ties the sale of one product to the purchase of another, is one way Nvidia abuses its monopoly power. These agreements, also called “tied” sales, are not always illegal, but they can be challenged under four provisions of the antitrust laws, according to the DOJ.

Both sections one and two of the Sherman Antitrust Act of 1890, which prohibit “restraint of trade” and make “monopolization” illegal, can be used to challenge tying agreements. Similarly, the DOJ could rely on section three of the Clayton Antitrust Act of 1914, which prohibits acts that will “substantially lessen competition,” or section five of the Federal Trade Commission Act of 1914, which prohibits “competition disloyal”.

Jim Keller, CEO of AI chip maker Tenstorrent, an Nvidia competitor, said information in August that Nvidia’s sales tactics were not illegal in his view, but he acknowledged that customers often “feel pressured to buy Nvidia networking equipment to guarantee access to the company’s vaunted AI server chips.”

As the DOJ investigates claims of tying, it will likely have to prove that the tying was done with formal contracts rather than just “pressure.”

But that can be difficult to do, according to Scott Bickley, practice leader and principal research director at Info-Tech Research Group, a technology research and consulting firm. He noted that the semiconductors have always been allocated on allocation schedules, with contracts that both parties agree to in advance, and Nvidia is not accused of breaching either contract.

“Of course, they’re going to try to sell their equipment — which they’re probably going to say is more compatible, that you’re going to get a better quality experience if you’re running Nvidia chips with Nvidia racks and things like that. But from what I understand and hear, they didn’t force it. They really encourage it, but they allow the biggest customers to use their own equipment and their own hardware for data center design,” he explained.

Bickley argued that the beef of the tying deal is largely a price match between Nvidia and its highly influential and powerful technology customers in a space with little or no serious competition.

“I don’t think Nvidia is doing anything — that I can see, at least on the surface — that would violate the law,” he said. “I think they’ve just become the 800-pound gorillas in a space where there are no other 800-pound gorillas fighting them right now.”

The potential use of exclusionary discounts is likely another reason the DOJ could investigate Nvidia for antitrust violations. “(They say) I’m only going to give you this good price if you don’t buy the competition. It’s not volume-based pricing, it’s exclusion-based pricing,” Moorhead explained, noting that “you can’t do that if you’re a monopoly.”

Nvidia’s CUDA software platform could also be under the microscope. CUDA is used in everything from low-level drivers to generative AI models and is not open sourced by competitors like AMD or Intel.

“Now, if you’re not a monopoly, that’s fine. If you have monopoly power, people might look at that and say, well, “You’re more in the market business, aren’t you?” Moorhead said, explaining that, “In this case, you have so much power that you have to open that up, even if it’s your competitors.”

However, Bickley argued that Nvidia is simply using its technological advantage to increase profits and gain market share, rather than engaging in anti-competitive behavior. Trying to fine, break up or slow down Nvidia would only hinder the development of AI, in his view.

“What we need is good, old-fashioned innovation,” Bickley argued. “You know, other companies coming up with competing products and technologies that are starting to absorb some of that investment from Nvidia.”

Potential impacts of a DOJ investigation into Nvidia

Nvidia could face significant challenges if a DOJ investigation finds antitrust violations, experts say. But even if there are no violations, the chipmaker’s business operations could be slowed, at least slightly, by the investigation.

“When you look at the Justice Department, it slows things down,” Moorhead explained, likening it to putting small pieces of sand in a gas tank. “You need a lawyer to approve your allocations. You must have a lawyer approve your price. You have to have a lawyer — at meetings where you normally wouldn’t have a lawyer.”

Nvidia could also be forced to open up its CUDA software platform to competitors in the worst-case scenario, leading to increased competition. “Apple had to open up the app store and Microsoft had to open up their API with Internet Explorer, probably something like this, which would allow AMD, Intel and others… to access CUDA in equally.” Moorhead explained.

If the DOJ can prove that Nvidia acted illegally, it could also have to pay large fines, and not just in the U.S. “I think this case will spread to the EU, Korea, Japan, and probably Taiwan — probably not China — which, again, it makes the control even higher. But essentially, he’s paying a fine,” Moorhead said.

However, neither Moorhead nor Bickley believe these fines will have a dramatic impact on Nvidia’s business, largely due to the company’s distinct technological advantage and growing revenue. Both experts also noted that it will take months, or more likely years, for the DOJ investigation to conclude.

“Until a conclusion is reached, whatever that conclusion is, the money will be made by Nvidia, so any fine they propose will basically be pocket change,” Bickley said. “I don’t think it’s going to have any material impact on them and their earnings and their financial position.”

Bickley doesn’t see the DOJ case succeeding either, despite negative investor reaction to news of the investigation. “I don’t really see a way for them to come up with any kind of true antitrust judgment,” he said. “I don’t think it’s going to come up much.”