The Strategist

Why is Nvidia paying $ 6.9 billion for network devices manufacturer?

03/20/2019 - 13:52

Not so famous ancillary equipment — network adapters and switches — has become the backbone of the business for Mellanox. Why are chip makers willing to pay billions for it?

Nvidia buys Israeli manufacturer of switches and network adapters Mellanox Technologies. The deal is estimated at $ 6.9 billion, which is a record amount in the history of the American company.

Nvidia is profitable and has become the undisputed market leader in graphics processors (GPU). The share of their closest competitor AMD in 2018 was greatly reduced. However, in October 2018, its shares fell sharply. The reasons were decline in sales of video cards due to the fact that the mining boom was over, and the new video cards could not show their best qualities in games, as it was expected in the last year. Therefore, companies have to look for new markets. Perhaps, the equipment of Mellanox will help the well-known chipmaker to overcome difficulties in the gaming market and open new lines of business.

Today, the vendor is highly dependent on sales of video cards. In 2017-2018, expensive graphics chips were most often bought by PC players and miners. The gaming market is growing strongly: by 2021, its volume is expected to reach $ 180 billion. But the bad news for Nvidia is that this market is not only growing, but also changing. Growth is driven by mobile gaming. In the meantime, the share of the PC on which the company relies is noticeably decreasing.

One of the reasons for decline in popularity of computer games is expensive hardware. Prices for top-end video cards start at $ 200. A good gaming computer costs $ 600-1000, which is at least 2 times more than the Playstation 4. In addition, the PC must be kept up to date. It is more profitable for gamers to buy a console once and enjoy games for 5-7 years before the new version is released.

The most popular modern gaming consoles - Playstation 4, Xbox One - use graphics chips Radeon AMD. Mobile device manufacturers almost do not use Tegra processors. Bitcoin collapse made mining unprofitable.

It turns out that Nvidia has to reduce its dependence on sales of video cards. One way is to launch an innovative cloud gaming service.

The cloud market is one of the most promising areas for earnings of high-tech corporations. In 2018, its global volume was estimated at $ 250 billion, which is 32% more than a year earlier.

Nvidia has a huge expertise in creating powerful computational hardware. Today, the corporation makes 1/3 of its revenue on data center equipment. It is no surprise that the business wants to increase earnings in this market.

Mellanox is a leader in the production of switches and network adapters InfiniBand and Ethernet. They allow quickly transferring information between servers, making the most of their computational resources. Among the company’s clients are NASA, Alibaba, Dell, Microsoft.

According to Nvidia CEO Jensen Huang, the company combines Nvidia computing platform with Mellanox hardware to create a new generation of data centers. Most likely, these technologies will interest the largest cloud providers - Amazon, Microsoft and Google.

A few years ago, cloud gaming services began to gain popularity. These platforms allow playing all the new (and resource-consuming) games even on the weakest laptops. Instead of spending money on buying a PC, users can “rent” a powerful computer through the cloud and pay only for the game.

Theoretically, such services can lower the “entry threshold” for a new audience. You only need to buy a license or a subscription to the game and allocate a small budget. However, stringent requirements are imposed on network devices instead of user device performance. A picture calculated in the cloud must be transferred to the user device very quickly. Any visible delay will ruin the game. Partly this is the reason why no one has yet managed to set up a massive cloud gaming service.

In early 2018, Nvidia opened a beta test of GeForce Now, its own service for cloud gaming. Functionality, convenience and a set of games are still very limited. Perhaps Mellanox will be able to bring the internal startup to an unattainable level for competitors.

Acquisition of Mellanox is a logical step towards transforming Nvidia. Tight integration with Mellanox equipment will help Nvidia to increase cloud-based B2B-revenue and reduce dependence on sales of video cards. Perhaps very soon the business will use the new data centers. And PC gamers will forget about buying their own powerful computer.