Monday, November 25, 2024

That’s why Nvidia’s aggressive sales tactics are within the crosshairs of the Justice Department

Nvidia, investors’ favorite AI vendor, has been on thin ice in recent weeks. Concerns in regards to the company’s high valuation, latest pressure from antitrust regulators, the sustainability of the AI ​​boom and the impact of the slowing U.S. economy have spooked even among the chipmaker’s most ardent defenders.

Nvidia shares have fallen about 18 percent since August 19, with the most important damage coming after a 9.5 percent plunge on Tuesday that worn out a record $279 billion in market capitalization.

Shortly after the black trading day for Nvidia, Bloomberg reported that the U.S. Department of Justice (DOJ) has intensified its antitrust investigation into the corporate. DOJ officials reportedly sent a subpoena to Nvidia and other firms involved that “contains legally binding requests requiring recipients to provide information,” based on an unnamed source. Bloomberg Sources accustomed to the matter said subpoenas often precede the filing of a proper grievance against an organization under investigation.

U.S. Department of Justice officials have expressed concern that Nvidia is making it difficult for its customers to modify to latest suppliers and penalizing those that don’t exclusively use its AI chips. BloombergThe US Department of Justice investigation into Nvidia began in July, The information First reportedafter competitors made similar allegations about Nvidia’s pricing strategy.

In a press release to AssetsNvidia said the corporate “wins on merit” and customers are free to decide on the answer that works best for them. The company “scrupulously” complies with all laws.

“We have asked the U.S. Department of Justice and have not been subpoenaed. However, we are happy to answer any questions regulators may have about our business,” a spokesperson added.

Still, there appear to be widespread problems with Nvidia’s tactics within the tech world.

“All of Nvidia’s competitors have filed complaints with 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 analytics and consulting firm. Assets.

“Nvidia customers not They didn’t discuss any of those tactics, but they talked about wanting a – what words did they use – ‘more balanced supply chain,'” he added.

Nvidia’s acquisition of RunAI, a provider of AI computing software, in April can be under the Justice Department’s scrutiny. BloombergReport. There are concerns that the acquisition will further strengthen Nvidia’s hold on your complete AI chip supply chain, making it harder for its customers to modify to competing products.

Overall, Moorhead believes this might ultimately be a “very serious investigation” for Nvidia. It could slow the corporate’s business somewhat, force it to open up parts of its software platform to competitors, or ultimately result in a hefty effective.

“The reason I say that is, first, Nvidia technically has a monopoly. Second, AI is hugely important to society, the economy and business today and in the future. So it’s a super hot topic [issue]. And that means regulators are highly motivated to do something,” he warned.

So is Nvidia a monopoly?

Nvidia Control about 90% of the next-generation AI-critical chip market and has taken major steps towards vertical integration lately, positioning itself not only as a chip company, but as a “AI platform for enterprises.”

Nvidia’s impressive market share gains and range of software and hardware AI offerings have given it a monopoly position, many experts consider, however the Justice Department can have to prove greater than that.

“It is not illegal to have a monopoly. It is illegal – when you have a monopoly – to suppress competition and harm consumers,” Moorhead noted.

Tying agreements, during which a seller ties the sale of 1 product to the acquisition of one other, are certainly one of the ways Nvidia allegedly abuses its monopoly position. These agreements, also called “tied selling,” are usually not all the time illegal, but will be challenged under 4 provisions of antitrust law: According to the Ministry of Justice.

Both sections one and two of the Sherman Antitrust Act of 1890, which prohibit “restraints of trade” and make “monopolization” illegal, will be used to challenge tying agreements. Likewise, the Justice Department could invoke section three of the Clayton Antitrust Act of 1914, which prohibits acts that “substantially restrain competition,” or section five of the Federal Trade Commission Act of 1914, which prohibits “unfair competition.”

Jim Keller, CEO of AI chipmaker Tenstorrent, a competitor of Nvidia, said The information in August that he didn’t consider Nvidia’s sales tactics were illegal, but acknowledged that customers often “feel pressured to buy Nvidia’s networking equipment in order to secure access to the company’s vaunted AI server chips.”

As the U.S. Department of Justice investigates allegations of tying agreements, it’ll likely need to prove that the tying agreements were entered into under official contracts and never simply imposed through “pressure.”

But that can be difficult, said Scott Bickley, practice lead and principal research director at Info-Tech Research Group, a technology research and consulting firm. He noted that semiconductors have all the time been distributed based on allocation plans, with contracts agreed to by each parties upfront, and Nvidia will not be accused of breaching the contract.

“Of course they’re going to try to sell their equipment – which they’ll probably claim is more compatible and that you get better quality if you run Nvidia chips with Nvidia racks and the like. But from what I know and hear, they haven’t forced that. They’re heavily encouraging it, but they’re allowing their largest customers to use their own equipment and their own hardware for their data center designs,” he explained.

Bickley argued that the tying dispute was essentially a tussle over prices between Nvidia and its very influential and powerful big-tech customers, in an area where there was little or no serious competition.

“I don’t think Nvidia is doing anything — at least on the surface — that would violate the law,” he said. “I think they’ve just become the 800-pound gorilla in an area where there’s currently no other 800-pound gorilla to challenge them.”

The potential use of exclusionary rebates is probably going another excuse why the U.S. Department of Justice may investigate Nvidia for antitrust violations.”[Those say] I’m only going to give you that good price if you don’t buy out the competition. It’s not volume-based pricing, it’s exclusionary pricing,” Moorhead explained, noting, “You can’t do that if you have a monopoly.”

Nvidia’s software platform CUDA is also under scrutiny. CUDA is used for the whole lot from low-level drivers to generative AI models, and it will not be open to make use of by competitors like AMD or Intel.

“If you don’t have a monopoly, that’s fine. If you have monopoly power, people might see that and say, ‘You’re more in the marketplace business, right?'” Moorhead said, explaining, “In that case, you have so much power that you have to open this up, even if it’s your competitors.”

Still, Bickley argued that Nvidia is solely using its technological advantage to extend its profits and gain market share somewhat than engaging in anti-competitive behavior. Trying to punish, break up or decelerate Nvidia would, in his view, only hinder the event of AI.

“What we need is good, old-fashioned innovation,” Bickley argued. “You need to bring other companies to market with competing products and technologies that will take some of that investment away from Nvidia.”

The potential impact of a Justice Department investigation on Nvidia

Nvidia could face significant problems if a Justice Department investigation uncovers antitrust violations, experts say. But even when there are not any violations, the investigation could not less than barely slow the chipmaker’s business.

“When the Justice Department is looking at someone, it slows things down,” Moorhead explained, comparing it to putting little grains of sand in a gas tank. “You have to have your allocations approved by a lawyer. You have to have your rates approved by a lawyer. You have to have a lawyer present at meetings where you wouldn’t normally have a lawyer present.”

In the worst case scenario, Nvidia is also forced to open its CUDA software platform to rivals, which might result in increased competition. “Apple had to open the App Store and Microsoft had to open its API for Internet Explorer. That would probably be something that would allow AMD, Intel and others to use CUDA on an equal basis,” Moorhead explained.

If the Justice Department can prove that Nvidia acted illegally, it may additionally need to pay large fines, and not only within the U.S. “I believe this case will expand to the EU, Korea, Japan and probably Taiwan – probably not China – which will increase the attention even further. But essentially it’s paying a fine,” Moorhead said.

However, neither Moorhead nor Bickley consider these fines can have a dramatic impact on Nvidia’s business, which is essentially because of the corporate’s significant technological lead and rising revenues. Both experts also identified that it’ll take months, or more likely years, for the Justice Department’s investigation to conclude.

“By the time there’s an outcome, whatever the outcome, Nvidia will have already made the money, so any penalty they propose is basically just pocket change,” Bickley said. “I don’t think it’s going to have any material impact on them, their earnings and their financial position.”

Bickley also doesn’t consider the Justice Department’s case will succeed, despite the negative response from investors to news of the investigation. “I don’t see any way they’re going to come to a truly anticompetitive ruling,” he said. “I don’t think the issue will come up much.”

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