According to graphics chip-maker NVIDIA (NASDAQ: NVDA ) , the market for games sold on Google's (NASDAQ: GOOG ) (NASDAQ: GOOGL ) popular Android platform will be worth $12 billion by the end of 2016. Although NVIDIA doesn't sell games directly to end users, it does hope to capitalize on this booming industry through the sale of performance-oriented mobile processors as well as other gaming-related hardware.
A two-pronged approach
NVIDIA has a long history as a graphics chip designer. It, along with longtime rival Advanced Micro Devices (NYSE: AMD ) , designs powerful graphics processors that go into consumer PCs, professional workstations, and even supercomputers.
However, in order to capitalize on the smartphone and tablet opportunities from a chip perspective, NVIDIA can't just sell stand-alone graphics processors -- it needs to provide highly integrated processors (known as "systems-on-chip") in order to be successful in the ultra-mobile device market.
Such chips integrate a host of sub-components, which include central processing units, graphics processors, dedicated video and image processors, and, in some cases, even cellular modems. NVIDIA's line of such products is sold under the "Tegra" brand.
In addition to offering mobile processors to third-party device vendors, the company has also been designing and selling its own gaming-oriented mobile computing devices (powered by its Tegra processors). To date, the company has released a handheld gaming device known as Shield Portable and a gaming-oriented tablet known as the Shield Tablet.
There's some interesting stuff going on here, so let's take a closer look.
A focus on performance with Tegra
NVIDIA's strategy with Tegra has evolved over time. Initially, the company appeared very interested in going after a large part of the mobile market, gunning for premium devices (tablets and higher-end phones) with one line of processors and for more mainstream smartphones with another.
However, according to Jen-Hsun Huang in an interview with CNET, NVIDIA's experience with its mainstream-focused Tegra 4i platform taught the company a valuable lesson.
"I think that for mainstream phones, there's one strategy that really works right now, which is price. That's not our differentiator," Huang said.
So, what exactly is NVIDIA's differentiator?
"[O]ur phone and device strategy is to focus on performance-oriented devices -- devices where performance and differentiation matter" said Nick Stam, senior director of technical marketing for NVIDIA in an email exchange. "[W]e partner with people that are looking for that performance differentiation and coolness factor."
Does Tegra K1 measure up?
NVIDIA's latest mobile processor is known as the Tegra K1, and it has shown up in a couple of performance-focused devices so far: the Xiaomi MiPad and NVIDIA's own Shield Tablet. Does it live up to the company's claims?
According to AnandTech, "the Tegra K1 is easily the fastest in all of [its] GPU benchmarks."
In a follow up piece, AnandTech noted that the Tegra K1 "delivers immense amounts of performance when necessary, but manages to sustain low temperatures and long battery life when it isn't."
Additionally, in my exchange with Stam, I raised the question of whether the Tegra K1 -- which has yet to show up in a commercially available smartphone -- could potentially power smartphones.
"Tegra K1 can deliver the best performance in a superphone power budget," Stam replied, presumably referring to larger-screen devices like the Xiaomi Mi3 (which comes with a 5-inch 1920-by-1080 display).
The second part of the equation: Shield
While NVIDIA still supplies Tegra processors to third-party device vendors, it has also begun to design and sell its own Tegra-powered devices under the "Shield" branding.
Last year, the company released a product known as the Shield Portable -- a handheld, Android-based gaming device. This year, NVIDIA followed that up with an 8-inch tablet known as the Shield Tablet. According to Stam, these Shield-branded products are intended to "leverage Android and build a gaming platform out of it."
While the company doesn't explicitly break out Shield revenue, the original Shield portable didn't do much to stop the 48% year-over-year decline in NVIDIA's Tegra revenue in fiscal 2014. However, the Shield tablet may fare better as it is, in the words of Engadget, "a solid, worthwhile 8-inch Android tablet in its own right, and it happens to have a host of novel features, to boot."
Though the company's Tegra business doing much better this year (up 35% and 200% year-over-year during the first two quarters of fiscal 2015), it's not yet clear how much of the company's Tegra revenue will come from device sales against more traditional chip sales. Nevertheless, if the Shield products turn out to generate material revenue, the company could choose to break out those sales numbers later on.
Foolish bottom line
Though NVIDIA's strategy to address the mobile gaming market has evolved markedly over time, it's clear that the goal is to try to compete in markets where its experience in developing gaming-oriented products will be valuable.
If there really is a market for, as Stam puts it, for "gamers that also want a tablet," NVIDIA seems well-positioned to capitalize on that demand with Tegra and Shield. Investors will likely get a much better picture of what this opportunity could ultimately amount to as the next 12-18 months play out.
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