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Investors\u2019 favorite AI play, Nvidia<\/a>, has been on thin ice in recent weeks. Concerns about its rich valuation, new pressure from antitrust regulators, the sustainability of the AI boom, and the impact of the slowing U.S. economy have spooked even some of the chipmaker\u2019s most ardent defenders.<\/p>\n Nvidia stock has dropped roughly 18% since Aug. 19, with the majority of the damage coming after a 9.5% plunge<\/a> on Tuesday that erased a record $279 billion in market cap.<\/p>\n Just after the dark day of trading for Nvidia, Bloomberg<\/em> reported that the U.S Department of Justice (DOJ) has ramped up its antitrust probe against the company. DOJ officials reportedly sent a subpoena<\/a> to Nvidia, and other involved companies, which includes \u201clegally binding requests that oblige recipients to provide information,\u201d according to unnamed Bloomberg <\/em>sources familiar with the matter. Subpoenas often precede the filing of a formal complaint against a company under investigation.<\/p>\n DOJ officials have expressed concern that Nvidia makes it difficult for its customers to switch to new suppliers and penalizes those that don\u2019t exclusively use its AI chips, according to Bloomberg<\/em>\u2019s sources. The DOJ investigation into Nvidia began in July, The Information<\/em> first reported<\/a>, after similar allegations from competitors about Nvidia\u2019s pricing strategies.<\/p>\n In a statement to Fortune<\/em>, Nvidia said that it \u201cwins on merit\u201d and customers are free to choose whatever solution works best for them, adding that the company \u201cscrupulously\u201d adheres to all laws.\u00a0\u00a0<\/p>\n \u201cWe have inquired with the U.S. Department of Justice and have not been subpoenaed. Nonetheless, we are happy to answer any questions regulators may have about our business,\u201d a representative added.<\/p>\n Still, the tech world\u2019s issues with Nvidia\u2019s tactics certainly seem to be widespread.<\/p>\n \u201cAll of Nvidia\u2019s competitors have issued grievances with me. I\u2019m not going to name them, but you can imagine who they might be,\u201d Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, a technology analyst and advisory firm, told Fortune<\/em>.\u00a0<\/p>\n \u201cNvidia\u2019s customers haven\u2019t<\/em> talked about any of these tactics, but they have talked about the desire to have\u2014what words did they use\u2014a more \u2018balanced supply chain,\u2019\u201d he added.<\/p>\n Nvidia\u2019s April acquisition of RunAI, which provides AI computation software, is also under the DOJ\u2019s microscope, per Bloomberg<\/em>\u2019s report. There are concerns that the purchase will further strengthen Nvidia\u2019s grip on the entire AI chip supply chain, making it more challenging for its customers to switch to competitor\u2019s products.<\/p>\n Overall, Moorhead believes this could end up being \u201ca very serious probe\u201d for Nvidia, which could slow its business slightly, force the company to open up some of its software platform for use by competitors, or, eventually, lead to a significant fine.<\/p>\n \u201cThe reason I say that is first of all, technically, Nvidia is a monopoly. Second, AI is super important to society, economics and business today and into the future. So it\u2019s a super hot button [issue]. And that means regulators are super motivated to do something,\u201d he warned.<\/p>\n Nvidia controls roughly 90%<\/a> of the AI-critical next-generation chip market, and it has made big steps toward vertical integration in recent years, branding itself as not just a chip company but an \u201cAI platform enterprise<\/a>.\u201d<\/p>\n The impressive market share gains and suite of both software and hardware AI offerings have made Nvidia a monopoly in the view of many experts, but the DOJ will have to prove more than just that.\u00a0<\/p>\n \u201cIt\u2019s not illegal to be a monopoly. It\u2019s illegal\u2014if you\u2019re a monopoly\u2014to squash competition and harm consumers,\u201d Moorhead noted.<\/p>\n Tying agreements, where a seller ties the sale of one product to the purchase of another, are one of the ways Nvidia is allegedly abusing its monopoly power. These agreements, also called \u201ctie-in\u201d sales, are not always illegal, but can be challenged under four provisions of antitrust laws, according to the DOJ<\/a>.<\/p>\n Both section one and section two of the 1890 Sherman Antitrust Act, which prohibit the \u201crestraint of trade\u201d and make it illegal to \u201cmonopolize,\u201d can be used to challenge tying agreements. Similarly, the DOJ could rely on section three of the 1914 Clayton Antitrust Act, which forbids acts that will \u201csubstantially lessen competition,\u201d or section five of the 1914 Federal Trade Commission Act, which prohibits \u201cunfair competition.\u201d<\/p>\n Jim Keller, CEO of the AI chipmaker Tenstorrent, an Nvidia competitor, told The Information<\/em><\/a> in August that Nvidia\u2019s sales tactics are not illegal, in his view, but he admitted customers often \u201cfeel pressured to buy Nvidia\u2019s networking gear to guarantee themselves access to the company\u2019s vaunted AI server chips.\u201d<\/p>\n While the DOJ is investigating claims of tying agreements, they will likely have to prove that the tying was done with official contracts, rather than merely \u201cpressure.\u201d<\/p>\n But that may be difficult to do, according to Scott Bickley, practice lead and principal research director at Info-Tech Research Group, a tech research and advisory firm. He noted that semiconductors have always been dished out on allocation schedules, with contracts both parties agree to in advance, and Nvidia isn\u2019t being accused of breaching any contracts.<\/p>\n \u201cOf course, they\u2019re going to try to sell their gear\u2014which they will probably say is more compatible, that you\u2019ll get a better quality experience if you run Nvidia chips with Nvidia racks and things like that. But to my understanding, and from what I\u2019m hearing, they haven\u2019t forced that. They\u2019re heavily encouraging it, but they\u2019re allowing their biggest customers to utilize their own gear and their own hardware for their data center designs,\u201d he explained.<\/p>\n Bickley argued that the tying agreement beef is largely a jockeying match for pricing between Nvidia and its very influential and powerful big tech clients in a space with little to no serious competition.<\/p>\n \u201cI don\u2019t think Nvidia\u2019s doing anything\u2014that I can see, at least on the surface\u2014that would be breaking the law,\u201d he said. \u201cI think they\u2019ve just become the 800 pound gorilla in a space where there\u2019s not any other 800 pound gorillas to fight them off at this point.\u201d<\/p>\n The potential use of exclusionary rebates is likely another reason the DOJ could be investigating Nvidia for antitrust violations. \u201c[Those say] I\u2019m only going to give you this good price if you don\u2019t buy the competition. It\u2019s not volume-based pricing, it\u2019s exclusionary-based pricing,\u201d Moorhead explained, noting \u201cyou can\u2019t do that if you\u2019re a monopoly.\u201d<\/p>\n Nvidia\u2019s software platform CUDA<\/a> might also be under the microscope. CUDA is used in everything from low level drivers to generative AI models, and it isn\u2019t open to competitors like AMD<\/a> or Intel<\/a> to use.<\/p>\n \u201cNow, if you\u2019re not a monopoly, that\u2019s fine. If you have monopolist powers, people might look at that and say, well, \u2018You\u2019re more in the marketplace business, right?\u201d Moorhead said, explaining that: \u201cIn that case, you have so much power you have to open this up, even if it\u2019s your competitors.\u201d<\/p>\n Still, Bickley argued that Nvidia is simply utilizing its technology advantage to increase profits and gain market share, rather than engaging in anti-competitive behavior. Attempting to fine, break up, or slow Nvidia would only impede the development of AI in his view.\u00a0<\/p>\n \u201cWhat we need is some good, old fashioned innovation,\u201d Bickley argued. \u201cYou know, have some other companies come out with competing products and technologies that start to siphon away some of that investment from Nvidia.\u201d<\/p>\n Nvidia could face significant challenges if a DOJ investigation<\/a> finds antitrust violations, experts say. But even if there aren\u2019t any violations, the chipmaker\u2019s business operations could be slowed, at least slightly, by the investigation.\u00a0<\/p>\n \u201cWhen anybody has the Department of Justice looking at them, it slows things down,\u201d Moorhead explained, likening it to putting small bits of sand in a gas tank. \u201cYou have to have a lawyer approve your allocations. You have to have a lawyer approve your pricing. You have to have a lawyer\u2014in meetings that you normally wouldn\u2019t have a lawyer in.\u201d<\/p>\n Nvidia could also be forced to open up its CUDA software platform to competitors in a worst-case scenario, leading to increased competition. \u201cApple<\/a> had to open up the app store, and Microsoft<\/a> had to open up its API with Internet Explorer, this would likely be something like that, which would enable AMD, Intel, and others\u2026to tap into CUDA on an equal basis,\u201d Moorhead explained.<\/p>\n If the DOJ is able to prove Nvidia acted illegally, it may need to pay heavy fines as well, and not just in the U.S.\u00a0 \u201cI do believe that this case is going to spread to the EU, Korea, Japan and likely Taiwan\u2014probably not China<\/a>\u2014which, again, just makes the scrutiny even higher. But essentially, it\u2019s paying a fine,\u201d Moorhead said.<\/p>\n However, neither Moorhead nor Bickley believe these fines will dramatically impact Nvidia\u2019s business, in large part due to the company\u2019s distinct technology advantage and surging revenues. Both experts also noted that it will take months, or more likely years, for the DOJ\u2019s investigation to conclude.<\/p>\n \u201cBy the time it comes to a conclusion, whatever that conclusion is, the money will have been made by Nvidia, so any fine that they put forward will be basically pocket change,\u201d Bickley said. \u201cI don\u2019t think it will have any material impact at all on them and their and their earnings and their financial position.\u201d<\/p>\n Bickley doesn\u2019t see the DOJ\u2019s case as likely to succeed, either, despite investors\u2019 negative reaction to news of the investigation. \u201cI don\u2019t really see a path for them to come up with any type of true anti-competitive judgment,\u201d he said. \u201cI don\u2019t think it\u2019s going to come up much.\u201d<\/p>\n<\/div>\n\nSo, is Nvidia a monopoly?<\/h2>\n
The potential impacts of a DOJ investigation on Nvidia<\/h2>\n