There is very little doubt that when it comes to graphics processors, it's tough to beat NVIDIA (NASDAQ:NVDA). The company, founded in 1993, has essentially built its multi-billion dollar business (with billions of dollars cumulatively invested in R&D) on the graphics processing unit, or the "GPU." Now, over the years, there were many players in the PC graphics space, but in the end it came down to NVIDIA (the market leader) and AMD via its acquisition of ATI. That being said, the surge in the number of companies developing low power graphics IP is turning the industry on its head.

NVIDIA's strategy: license IP and fundamental patents
In order to add an additional revenue stream to its business, NVIDIA has begun licensing its GPU designs and its patent portfolio. The primary source of revenue that's expected from this move is from actually licensing out the firm's excellent GPU designs. The idea here is actually pretty clever as it allows NVIDIA to profit (in a pretty hands-free way) from mobile system-on-chip products that may serve a captive audience to whom buying a Tegra system-on-chip would be infeasible. Think, for example, Apple (NASDAQ:AAPL) or Samsung. Also, this allows NVIDIA to get its GPU IP into system-on-chip products that may be targeted at segments in which the company doesn't play today.

However, this isn't the extent of the company's efforts in the IP licensing space. In addition to licensing fully designed GPU cores, NVIDIA has made it clear that it is also willing to license out its war-chest of patents. While this may raise some eyebrows, do note that Intel (NASDAQ:INTC) has been turning over a hefty sum ($1.5 billion over five years – or a cool, hands-free $300 million per year) to NVIDIA so that it can have the freedom to design high performance GPUs without worrying about infringing on NVIDIA's fundamental patents.

The patent licensing could get interesting
While the actual GPU IP licensing business is nice (but not exactly as lucrative as selling a full-blown SoC or – even better – a discrete GPU), there's a lot of competition here from ARM, Vivante, and others. Further, with royalties that essentially amount to pennies per chip, it'd take some pretty significant, high-volume wins to make a meaningful impact on the financials.

However, it's interesting to note that NVIDIA claimed at a recent BMO presentation that it owns over 500 "key" graphics patents – while the next closest key patent holder (Intel) has just fewer than 200. NVIDIA has close to 7000 patents in total, many of which are probably non-trivial to the design of higher performance GPUs. While it's too soon to tell, NVIDIA could start going after the likes of ARM and Qualcomm (which has been vocal about pushing the envelope on mobile GPU designs) if their highly popular GPU designs are shown to infringe on NVIDIA's patent war-chest. Further, Apple is extremely serious about doing its own GPU designs for its A-series mobile chips down the line, so seeing the Cupertino giant license NVIDIA's patent war-chest wouldn't be a surprise.

Foolish bottom line
Great technology under the stewardship of a great management team usually leads to great things for shareholders. While it's too soon to tell just how lucrative NVIDIA's patent portfolio can really be, it's probably not a stretch to assume that there's a lot of potential here if Intel was forced to cough up $1.5 billion to use NVIDIA's graphics patents (and remember: Intel is the second-largest fundamental patent holder in graphics). Time will tell, of course, but it's tough to ignore just how valuable NVIDIA's technology and its patents really are.