NVIDIA (NASDAQ:NVDA) recently launched two versions of its new Shield set-top Android TV box. Both models are powered by the company's Tegra X1 quad-core processor with 256 GPU cores and 3GB of RAM. The $199 model has just 16GB of storage, while the $299 model gets 500GB. Both Shields come with a $30 Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Play gift card and three months of Google Play Music.
The Shield is much pricier and powerful than comparable devices such as Google/Asus' Nexus Player, Razer's Forge TV, and Amazon.com's Fire TV, which cost between $79 and $149. Is there actually a market for these high-end Android set-top streaming media and gaming devices? More importantly, why is NVIDIA -- a company that makes most of its money from GPU sales -- developing a streaming set-top box?
The odd history of Shield devices
NVIDIA launched its first Shield device, the handheld Shield Portable Android console, in July 2013. The device, which resembled an Xbox controller with a flip-up screen, initally cost $299.
A common criticism was that the Shield Portable cost more than handheld devices such as the Nintendo 3DS and Sony PS Vita, and barely less than Microsoft's Xbox One and Sony's PlayStation 4. Meanwhile, the vast majority of Android games were still designed for touchscreens. NVIDIA never disclosed exactly how many Shield Portables it sold, although CEO Jen-Hsun Huang acknowledged during a conference call that revenue was "modest."
But instead of giving up, NVIDIA expanded the Shield family with a gaming tablet the following year. The device was powered by a 2.2Ghz Tegra K1 processor, had 2GB of RAM, a microSD slot, and other standard features for higher-end tablets. The 16GB Wi-Fi only model cost $299, while the Wi-Fi/LTE version cost $399. With the Shield tablet, NVIDIA introduced GRID, a cloud gaming service that launched last November.
Using GRID, tablet gamers could stream and play PC games on the tablet with a $60 wireless controller. Another feature, GameStream, let gamers stream games locally over a home network. The tablet can also be hooked up to a TV in "console mode" to become a large-screen Android console with cloud streaming capabilities. This was an interesting attempt to make a sort of "Swiss army knife" for gaming, but a Shield tablet and wireless controller still cost roughly the same as an Xbox One or PS4.
You can build it, but they won't come
The new Shield Android TV set-top box suffers from the same problems as the handheld device and tablet.
Consumers who just want a streaming stick with mirroring and simple games can buy a Chromecast for $35. Those looking for a little more horsepower can buy an Apple (NASDAQ:AAPL) TV for $69, a Nexus Player for $79, or an Amazon Fire TV for $99. Android gaming enthusiasts who want a more powerful gaming console can buy Razer's Forge TV -- which has specs comparable to a high-end Android phone -- with a controller for just $149.
However, a recent benchmark at Softpedia shows that the Shield Android TV's new Tegra X1 processor easily crushes high-end mobile chips such as Qualcomm's (NASDAQ:QCOM) Snapdragon 810 and Samsung's Exynos 7420.
But here's the problem: if Qualcomm and Samsung's processors represent the top of the Android market, most games will be developed for hardware that is less powerful. Simply put, NVIDIA might have made the world's most powerful Android console, but that doesn't mean cheaper devices can't play the exact same games.
Why NVIDIA keeps expanding the Shield family
Due to their niche appeal, Shield devices probably won't generate meaningful revenue for NVIDIA. However, investors shouldn't ignore the real reason they exist: to showcase the company's Tegra systems-on-chips, which are also found in smartphones and tablets. Last quarter, revenue from Tegra processors rose 4% annually and accounted for nearly 13% of NVIDIA's top line.
The Tegra business faces rising competition from Qualcomm, Samsung, and Intel (NASDAQ:INTC). Samsung is dangerous because it is beefing up its chipmaking operations and relying more on its own high-end chips. Intel is a threat because it is buying its way into the mobile market with subsidies and gaining market share with turnkey designs.
NVIDIA needs its Tegra chips to stand out in this market through their graphical horsepower. The company also believes the X1, found inside its set-top box, could help self-driving cars quickly "read" the surrounding environment to avoid collisions. Therefore, the Shield devices showcase that horsepower while connecting a niche gaming ecosystem to NVIDIA's larger GPU business.
The key takeaway
I believe NVIDIA's Shield devices aren't intended to challenge mainstream consoles such as the Xbox One or PS4 or streaming sticks like Chromecast. Instead, NVIDIA likely intends for Shield devices (in their limited quantities) to simply showcase the Tegra's graphical abilities to convince more mobile-device makers, automakers, and other companies to give its chips a chance.