After NVIDIA (NASDAQ:NVDA) dove head-first into the handheld gaming market with Shield, rumors emerged that the company would soon release a tablet of its own. On Sept. 18, the company officially announced the Tegra Note, a complete tablet platform powered by the Tegra 4 mobile processor. NVIDIA won't be manufacturing the device, however. The Tegra Note is a reference design which will be manufactured by partners such as EVGA and PNY Technologies, the same companies which build NVIDIA's GPUs.
A quick look
The Tegra Note will be powered by the Tegra 4 processor and have a 7-inch 1,280-by-800 LCD display. NVIDIA is claiming that the device will be the world's fastest 7-inch tablet, while still able to achieve 10-plus hours of battery life while playing HD video. NVIDIA's DirectStylus technology is included, which uses Tegra's image-processing power to analyze touch input and differentiate between different types of strokes. An example is using one end of a stylus for drawing and the other end as an eraser.
A front-facing and back-facing camera are included, again using the Tegra's processing power to enhance image taking. Easy access to TegraZone, offering Tegra-optimized games, gives the Tegra Note a gaming edge over non-Tegra tablets. And over-the-air software updates directly from NVIDIA will ensure that the tablet will always be able to handle the newest graphically intensive games.
The Tegra Note will start at $199, although higher-end versions which cost more may also be offered by the various partners.
An improved strategy
Up until this point, NVIDIA has been largely relying on OEMs to use the Tegra processors in their various tablet offerings. Microsoft used a Tegra 3 in the Surface RT and will use a Tegra 4 in the second iteration of that tablet. Google used the Tegra 3 in the Nexus 7, and companies ranging from Asus to Lenovo made various other Tegra-based devices.
But the only thing differentiating these tablets from the rest was an entry on the spec sheet. The Tegra Note aims to change that, creating a platform with unique features and a compelling value proposition. At the same time, NVIDIA is avoiding the costs of manufacturing the hardware, much like in its GPU business, likely leading to a lower break-even point in terms of unit sales.
The goal for NVIDIA is to get the Tegra processor into as many devices as possible, and by providing a reference design, NVIDIA allows its partners to avoid having to design a tablet from scratch. I think that this is the best strategy for NVIDIA going forward, and I expect Tegra sales to pick up toward the end of this year.
The reason for passing off the actual manufacture of hardware to partners can be explained by the story of Barnes & Noble's (NYSE:BKS) ill-fated foray into tablets. After the reasonable success of its line of e-readers, the bookseller decided to heavily push its Nook tablets, essentially betting the company on its success. While the hardware was solid, the problem was competition.
Low-end tablets are quickly becoming a commodity, with prices continuously falling. What this means is that companies which manufacture low-end tablets, much like PC manufacturers before them, have seen and will continue to see their margins contract. High-end manufacturers like Apple and Samsung do well, but cheap Android tablets are a dime a dozen.
NVIDIA is doing something similar to what Microsoft did with PCs. Instead of building the actual hardware, NVIDIA is designing the platform, and its success is largely independent of the retail price of the devices. This is much like Windows for PCs, where licenses are sold regardless of the underlying price of the computer.
Barnes & Noble took the other route, selling commodity hardware in an ultra-competitive market. The Nook division is dragging down the company, which has posted losses in each of the past three years. Without the Nook, B&N would actually be profitable, albeit in decline, and the best strategy is to simply ditch the tablet business and focus on being a bookseller.
Tegra vs. Fire
At $199, the Tegra Note will be priced similarly to the Kindle Fire from Amazon (NASDAQ:AMZN). Amazon sells its hardware at rock-bottom prices in order to sell content such as e-books, movies, and TV shows to its users. The company likely makes no money at all from its hardware, making it incredibly difficult to compete with at the low end.
The key for the Tegra Note is games. The Tegra 4 processor has the most advanced graphics available, making the Tegra Note the clear choice for gamers. The Kindle Fire is not built for speed, being only as quick as is necessary in order to keep the costs down, and it's aimed at a completely different market. The Fire is a consumption device, the sole purpose of which is to sell content. The Tegra Note is built for gaming, with support for game controllers as well as Tegra-specific games.
With plenty of cheap Android tablets available, the Kindle Fire doesn't really stand out. The Nexus 7 from Google, for example, sells for only slightly more, even with a higher resolution and better performance. The Tegra Note uses graphics to differentiate itself, and as the lineup of Tegra-optimized games grows, it should draw gamers away from the competition.
The bottom line
It would make little sense for NVIDIA to manufacture its own tablet. Creating a reference design for its partners makes a lot more sense, and I believe it is the best chance NVIDIA has to get the Tegra processor into a significant number of devices. The price is low enough that the enhanced gaming provided by the Tegra is within reach of the bulk of consumers. What NVIDIA has done is create the first true gaming tablet. It should do quite well.
Timothy Green owns shares of NVIDIA. The Motley Fool recommends Amazon.com and NVIDIA. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.