As an NVIDIA (NASDAQ: NVDA ) shareholder for about a year now, it has been a rewarding experience to see the shares be driven meaningfully higher. It has always been clear that the company is run by an excellent management team and develops truly world-class graphics processors and accompanying software. That being said, a lot has been made of rival Advanced Micro Devices' (NYSE: AMD ) recent launch of its Mantle API, and many in the investment community seem to think that AMD is poised to regain meaningful share in the discrete GPU market. Should NVIDIA's shareholders be worried?
Some technical background
In order to write programs that utilize a graphics processor, a programmer must use a library of functions (think of these as commands) that act as an intermediary between the program and the underlying graphics processor. These libraries, known as application programming interfaces, or APIs, are required so that programmers don't need to write special code for each type of graphics processor out there. The upside is that this makes life a lot easier for programmers, but the downside is that the overhead introduced by these APIs comes at the cost of some performance.
The two major PC graphics APIs in use today are OpenGL, managed by the Khronos Group, and Microsoft's (NASDAQ: MSFT ) DirectX. The ease of use and flexibility of DirectX (after a few disastrous iterations) was one of the key reasons that Microsoft was able to establish Windows as the gaming platform of choice, as DirectX was Windows-only. So, AMD took it upon itself to introduce yet another graphics API -- known as Mantle.
Mantle looks interesting...
AMD's Mantle programming interface promises to be a much "closer-to-the metal" API -- that is, developers can build games with it that can access the hardware with far less overhead, thereby improving performance. Apparently AMD has already gotten the attention of key developers, such as Electronic Arts and Activision-Blizzard, with promises that more support should be announced during the coming months. If such support becomes more widespread, then AMD's graphics cards could have a legitimate performance advantage in a number of games.
What of NVIDIA?
While the above may seem like doom and gloom for NVIDIA, keep in mind that the company still has a number of key advantages. First and foremost, AMD's graphics division is barely profitable -- particularly as excessive game bundles tend to eat into profitability -- while NVIDIA's is raking in the dough. Further, while NVIDIA's consumer GPU business is important, its professional workstation and HPC cards, known as Quadro and Tesla, are the real cash cows. Despite grandiose theoretical performance claims from AMD with respect to high-performance computing, NVIDIA's CUDA parallel computing platform is the gold standard in HPC with about 90% of the HPC accelerator market. NVIDIA also owns the lion's share of the workstation GPU market, which is where the real money is made in the discrete GPU business.
Further, NVIDIA is the clear market segment share leader in discrete PC graphics, particularly in laptops. This success has been largely due to superior brand equity, coupled with a much more robust technology -- called Optimus -- for switching between integrated and discrete graphics to maximize battery life. AMD's competing technology, Enduro, is still not quite up to speed. As a result of this significant market share, coupled with NVIDIA's superb developer relations, it is not at all clear that most developers will be so keen to spend the extra time and money to develop separate code paths for the smaller player in the space. The entire point of OpenGL/DirectX is to make the developers' lives easier.
Finally, while not anywhere nearly as publicized, NVIDIA actually has its own closer-to-the-metal SDK called NVAPI that exposes the GPU more directly to game developers in a manner very similar to what AMD's Mantle does. It is likely that in the wake of the Mantle hype, NVIDIA may begin to push its NVAPI more aggressively.
The Foolish bottom line
While AMD is wonderful at making bold promises, the reality of the situation is that its GPU market share is still dwarfed by NVIDIA's, and its operating profit more so. Mantle is certainly an interesting technology, and and there has been a lot of initial cheering from a number of developers. But it remains to be seen how big of a deal it ultimately turns out to be in driving meaningful share gains for AMD in the GPU space and -- more importantly -- higher operating profit. After all, a company can give away only so many free games in a bid to gain share before investors start asking about these things called "profits," which, coincidentally enough, NVIDIA has been able to generate in spades.
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