NVIDIA’s announcement about its $40 billion acquisition of a UK-based Arm Holdings sent shockwaves in the tech world.
NVIDIA is probably best known to the wide public for its graphics processing units (think PCs and gaming). However, it is heavily involved in the mobile and automotive chips market. And that is where the problem with this acquisition lies.
Arm Holdings’ main business is mobile chips and licenses, which they provide to 90% of the smartphone market. Their customers include all the Big Tech giants such as: Google, Apple, Amazon, Samsung and others. What’s fascinating is that up to this point no one questioned Arm Holdings’ (technically) monopoly of the market. Now, all of a sudden, its dominance has attracted the unwanted attention of the media.
While the deal was a great success for SoftBank, who have been looking to unwind their investments as of late, for NVIDIA to pay 20.6x Arm Holdings sales as of 2020 may seem like an overkill. And yet, this could prove to be a very worthy gamble. That is, if the antitrust authorities in the U.S. don’t “smell blood”.
With new chip developments, NVIDIA would be the first to benefit from Arm Holdings research and innovation. It would also mean that the costs for NVIDIA to access this technology would be lower, putting them miles ahead of their competitors.
Companies in all industries are known to look for ways to cut costs while increasing their market share in their specific niche. Acquiring a business that provides such solution can be a huge win…and yet if viewed as creating an unfair competitive advantage, this could attract the attention of the antitrust authorities in the U.S.
The most extreme example from the past would be when John Rockefeller’s Standard Oil was getting rebaits from the railway companies, when competitors used those railway companies. In simple terms: every time oil company A used a train, not only would they pay a premium on top, but part of that premium would go straight to its competitor – Standard Oil!
And who is to say that this won’t be the case with NVIDIA? If we look at the history of antitrust hearings for tech in particular, most people would remember Microsoft’s case in the early 2000’s. This is primarily thanks to YouTube clips of Bill Gates pretty much ******* around during the whole deposition.
However, this was one of the first big tech hearings, where it was shown that the government will get involved in tech affairs, if it believes that it threatens free market competition (or if it has political reasons to do so).
With the recent anti-trust hearings aimed at Amazon, Facebook, Apple and Google, one has to ask whether it is wise for NVIDIA to turn the media’s attention to their own “kitchen”.
Are there alternatives?
It would be critical to NVIDIA to prove that there are alternatives in the market. However, as was pointed out by the Financial Times, these alternatives are nowhere near Arm Holdings’ level. Risc-V is apparently “yet to advance beyond low-value chips”, meaning it will take a while for them to catch up (if it is at all possible). With NVIDIA backing it, Arm Holdings will not give up it’s lead position in the market easily, and so what’s more likely to happen is that we will see Jensen Huang (NVIDIA’s CEO) explaining himself to congress fairly soon.
Could this be avoided? Only in theory, if NVIDIA prove that they are not monopolising the chip-making market, and that other companies could provide alternatives to their competitors. The problem lies in the fact that that is not the case.
What does the future hold?
This would be a very interesting space to watch. In my opinion what would happen (considering all the recent legal wars that companies have been waging against Apple and its App Store), is that sooner or later Intel or another company/companies would bring a case against NVIDIA.
What wold be the outcome of such hearing? Most likely minor changes to company’s practices and likely dominance of the chip market by NVIDIA for years to come. That is unless we see another company rise up to the challenge. After all has much changed since Mark Zuckerberg’s legendary deposition in 2018?
P.S. Sometimes I wish I didn’t find Intellectual Property so boring during my legal studies – some law firms will be making quite a few “bucks” on these legal battles in the next 5-10 years…