AI games are popular with investors, Nvidiahas been on thin ice in recent weeks. Concerns about its high valuation, renewed pressure from antitrust regulators, the sustainability of the AI boom and the impact of a slowing U.S. economy have left even some of the chipmaker’s most ardent defenders spooked.
Nvidia shares have fallen about 18% since August 19, with much of the damage coming after a 9.5% off on Tuesday erased a record $279 billion in market capitalization.
Immediately after Nvidia’s dark trading day, Bloomberg The U.S. Department of Justice (DOJ) has stepped up its antitrust investigation into the company, according to reports. DOJ officials are said to have sent a summons to Nvidia and other related companies, including “legally binding requests that require recipients to provide information,” according to an unnamed source. Bloomberg Subpoenas are typically issued before a formal complaint is filed against a company under investigation, the person said.
DOJ officials have expressed concern that Nvidia is making it difficult for its customers to switch to new suppliers and penalizing those who don’t use its AI chips exclusively, according to BloombergThe DOJ’s investigation into Nvidia began in July, Information Firstly reportedfollowing similar allegations from competitors about Nvidia’s pricing strategy.
In a statement to LuckNvidia said it “won on the merits” and customers were free to choose whichever solution worked best for them, adding that the company “strictly adhered” to all regulations.
“We have requested a subpoena from the US Department of Justice and have not been subpoenaed. However, we are happy to answer any questions regulators may have about our business,” a representative added.
Still, the tech world’s problems with Nvidia’s tactics certainly seem to be widespread.
“All of Nvidia’s competitors have filed complaints with me. I won’t name them, but you can imagine who they are,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, a technology consulting and analysis firm. Luck.
“Nvidia customers not yet talked about any of these tactics, but they talked about wanting to have—what did they use the word—a ‘more balanced supply chain,’” he added.
Nvidia’s April acquisition of RunAI, a company that provides AI computing software, is also in the DOJ’s crosshairs, according to BloombergThe acquisition is feared to further consolidate Nvidia’s control over the entire AI chip supply chain, making it harder for customers to switch to competitors’ products.
Overall, Moorhead believes this could be “a very serious investigation” for Nvidia, one that could slow down the company’s business a bit, force it to open up some of its software platforms for use by competitors, or ultimately result in a significant fine.
“The reason I say that is first of all, Nvidia is technically a monopoly. Second, AI is incredibly important to society, the economy, and business now and in the future. So this is an incredibly hot button. [issue]. And that means regulators are very motivated to do something,” he warned.
So is Nvidia a monopoly?
Nvidia control about 90% of the next-generation chip market critical to AI and has made big strides toward vertical integration in recent years, branding itself not just as a chip company but as a “AI Platform Business“ .
Many experts believe Nvidia’s impressive market share growth and suite of AI software and hardware products have helped it become a monopoly, but the Justice Department will have to prove more than that.
“It’s not illegal to be a monopoly. But it is illegal—if you’re a monopoly—to suppress competition and harm consumers,” Moorhead notes.
Tying deals, in which a seller ties the sale of one product to the purchase of another, are one way Nvidia has been accused of abusing its monopoly power. These deals, also known as “tied” sales, are not always illegal, but can be challenged under four provisions of antitrust law, according to DOJ.
Both sections one and two of the Sherman Antitrust Act of 1890, which prohibits “restraint of trade” and makes “monopolies” illegal, can be used to challenge tying agreements. Likewise, the DOJ can rely on section three of the Clayton Antitrust Act of 1914, which prohibits conduct that “substantially lessens competition,” or section five of the Federal Trade Commission Act of 1914, which prohibits “unfair competition.”
Jim Keller, CEO of AI chip maker Tenstorrent, a competitor to Nvidia, said Information in August that Nvidia’s sales tactics were not illegal in his view, but he acknowledged that customers often “felt pressured into buying Nvidia’s networking gear to secure access to the company’s vaunted AI server chips.”
While the Justice Department is investigating claims of tying agreements, they will likely have to prove that the tying was done through formal contracts, and not simply “pressure.”
But that could be difficult to do, according to Scott Bickley, practice director and principal research director at Info-Tech Research Group, a technology research and consulting firm. He noted that semiconductors are always allocated on an allocation schedule, with contracts that both parties agree to in advance, and Nvidia is not accused of breaching any contracts.
“Of course, they will try to sell their equipment—which they will probably say is more compatible, that you will get a better quality experience if you run Nvidia chips with Nvidia brackets, and things like that. But from my understanding, and from what I hear, they are not forcing that. They are strongly encouraging that, but they are allowing their largest customers to use their own equipment and hardware for their data center designs,” he explained.
Bickley argues that this binding agreement is largely a price war between Nvidia and large tech customers with influence and power in a sector with virtually no serious competitors.
“I don’t think Nvidia is doing anything — at least on the surface — that would violate the law,” he said. “I think they’re just becoming the 800-pound gorilla in a space where there’s no other 800-pound gorilla that can compete with them at this point.”
The use of exclusionary refunds may be another reason the DOJ is investigating Nvidia for antitrust violations.[Those say] I only give you this good price if you don’t buy from the competition. It’s not a volume-based price, it’s an exclusion-based price,” Moorhead explained, noting that “you can’t do that if you’re a monopoly.”
Nvidia Software Platform CUDA can also be scrutinized. CUDA is used in everything from low-level drivers to generative AI models, and it is not open to competitors like AMD Processor or Intelligence to use.
“Now, if you’re not a monopoly, that’s fine. If you have monopoly power, people can look at that and say, well, ‘You’re doing more business in the market, right?'” Moorhead said, explaining that: “In that case, you have so much power that you have to expand this, even if it’s your competitor.”
Bickley, however, argues that Nvidia is simply using its technological advantage to increase profits and gain market share, rather than engaging in anti-competitive behavior. In his view, trying to fine, break up, or slow down Nvidia would only hinder the development of AI.
“What we need is some good, old-fashioned innovation,” Bickley argued. “You know, some of the other companies that are coming out with competing products and technologies are starting to take some of that investment away from Nvidia.”
Potential Impact of DOJ Investigation on Nvidia
Nvidia could face significant challenges if DOJ investigation experts say the investigation has found antitrust violations. But even if no violations are found, the chipmaker’s business could be slowed, at least a little, by the investigation.
“When anyone is under DOJ scrutiny, things slow down,” Moorhead explains, likening it to putting small grains of sand in a gas tank. “You have to have lawyers approve your allocations. You have to have lawyers approve your prices. You have to have lawyers—in meetings where you wouldn’t normally have lawyers.”
In a worst case scenario, Nvidia could also be forced to open up its CUDA software platform to competitors, leading to increased competition.Apple must open app store and Microsoft have to open up their API to Internet Explorer, which would likely do the same, allowing AMD, Intel, and others… to exploit CUDA on equal footing,” Moorhead explained.
If the Justice Department can prove that Nvidia acted illegally, the company could also face large fines, and not just in the United States. “I believe this will spread to the EU, South Korea, Japan, and potentially Taiwan—probably not china—which, again, just invites more scrutiny. But it’s essentially paying the fine,” Moorhead said.
However, neither Moorhead nor Bickley believe the fines will have a significant impact on Nvidia’s business, largely due to the company’s distinct technological advantage and soaring revenue. Both experts also noted that it will take months, or more likely years, for the DOJ’s investigation to conclude.
“By the time they reach a conclusion, whatever the conclusion is, Nvidia has made money, so any fine they impose will basically be pocket change,” Bickley said. “I don’t think it will have any significant impact on them and their earnings and their financial position.”
Bickley also doesn’t see the DOJ’s lawsuit as likely to succeed, despite investors’ negative reaction to news of the investigation. “I really don’t see any path for them to get any kind of real anti-competitive ruling,” he said. “I don’t think there’s going to be many of those rulings.”
