Here’s why Nvidia’s aggressive sales tactics are in the DOJ’s crosshairs

Nvidia shares have fallen about 18% since Aug. 19, with most of the damage coming after a 9.5% drop on Tuesday that erased a record $279 billion in market value.

After a dark day of trading for Nvidia, Bloomberg The U.S. Department of Justice has reportedly intensified its antitrust investigation into the company. Justice Department officials have reportedly sent a subpoena to Nvidia and other companies involved, which includes “legally binding requests requiring recipients to provide information,” according to unnamed sources. Bloomberg Sources familiar with the matter. Summonses often precede a formal complaint against the company under investigation.

Justice Department officials are concerned that Nvidia will make it harder for its customers to switch to new suppliers and punish those who don’t use its AI chips exclusively, according to BloombergThe US Department of Justice investigation into Nvidia began in July. Information Firstly Reportedfollowing similar allegations from competitors about Nvidia’s pricing strategies.

In a statement to luckNvidia said it “wins well” and that customers are free to choose whichever solution works best for them, adding that the company is “strictly” adhering to all laws.

“We have inquired with the US Department of Justice and have not been subpoenaed,” a company representative added. “However, we are happy to answer any questions regulators may have about our business.”

However, the tech world’s problems with Nvidia’s tactics seem to be widespread.

“All of Nvidia’s competitors have filed complaints against me. I won’t name them, but you can imagine who they might be,” said Patrick Moorhead, president of Moor Insights & Strategy, a technology analysis and consulting firm. luck.

Nvidia customers It wasn’t “Nobody talked about any of these tactics, but they talked about wanting to have a more balanced supply chain,” he added.

Nvidia’s April acquisition of RunAI, which provides AI computing software, is also under Justice Department scrutiny, according to BloombergThere are concerns that the purchase will strengthen Nvidia’s grip on the entire AI chip supply chain, making it harder for its customers to switch to competitors’ products.

Overall, Moorehead believes this could end up being a “very serious investigation” for Nvidia, which could slow down its business a bit, force the company to open up some of its software platforms for use by competitors, or ultimately, result in a large fine.

“The reason I say this is first and foremost, technically, Nvidia is a monopoly,” he warned. “And secondly, AI is incredibly important to society, to the economy, to business today and in the future. So it’s a very important topic. And that means regulators have a huge incentive to do something.”

So, is Nvidia a monopoly?

NVIDIA Controls About 90% From the next-generation chip market that relies on artificial intelligence, it has made great strides toward vertical integration in recent years, describing itself as not just a chip company but a “AI Platform for Enterprise“.”

Nvidia’s impressive market share gains and array of AI offerings in both software and hardware have made it a monopoly in the eyes of many experts, but the Justice Department will have to prove more than that.

“It’s not illegal to have a monopoly,” Moorehead noted. “But it is illegal, if you’re a monopolist, to crush competition and hurt consumers.”

Tying agreements, where a seller links the sale of one product to the purchase of another, are one way Nvidia exploits its monopoly power. These agreements, also called “tie sales,” aren’t always illegal, but they can be challenged under four provisions of antitrust laws: According to the Ministry of Justice.

Both Sections I and II of the Sherman Antitrust Act of 1890, which prohibit “restraint of trade” and make “monopoly” illegal, could be used to challenge tying agreements. Similarly, the Justice Department could rely on Section III of the Clayton Antitrust Act of 1914, which prohibits actions that “substantially abridge competition,” or Section V of the Federal Trade Commission Act of 1914, which prohibits “unfair competition.”

Jim Keller, CEO of AI chip maker Tenstorrent, a competitor to Nvidia, said, Information In August, he said that Nvidia’s sales tactics were not illegal, in his view, but admitted that customers often “feel pressured to buy networking equipment from Nvidia to ensure they have access to the AI ​​server chips the company is known for.”

While the Justice Department is investigating allegations of tying agreements, it will likely have to prove that the tying was done through formal contracts, not just “lobbying.”

But that may be difficult to do, according to Scott Beckley, practice leader and principal research director at Info-Tech Research Group, a technology research and consulting firm. He noted that semiconductors have always been distributed according to allocation schedules, with contracts agreed upon by both parties in advance, and Nvidia is not accused of violating any contracts.

“Of course, they will try to sell their equipment — which they will probably say is more compatible, that you will get a better quality experience if you run Nvidia chips with Nvidia racks and things like that. But from my understanding, and from what I hear, they have not mandated that. They strongly encourage it, but they allow their largest customers to use their own equipment and their own hardware for their data center designs,” he explained.

Beckley alleged that the dispute over the interconnect agreement is essentially a price competition between Nvidia and its large, influential, and powerful tech customers in a space where there is little serious competition.

“I don’t think Nvidia is doing anything — to my knowledge, at least on the surface — that would violate the law,” he said. “I think they’ve become like an 800-pound gorilla in a place where there’s no other 800-pound gorilla to fight at this point.”

The potential use of exclusionary discounts is likely another reason the Justice Department could investigate Nvidia for antitrust violations. “(They say) ‘I’ll give you this good price only if you don’t buy the competition.’ It’s not volume pricing, it’s exclusionary pricing,” Moorhead explained, noting that “you can’t do that if you’re a monopoly.”

Nvidia Software Platform Coda It may also be under the microscope. CUDA is used in everything from low-level drivers to generative AI models, and competitors like AMD or Intel can’t use it.

“Well, if you’re not a monopoly, that’s fine. If you have monopoly power, people might look at that and say, ‘Well, you’re more active in the labor market, right?’” Morehead said, explaining: “In that case, you have a lot of power to open up this space, even if it’s to your competitors.”

However, Beckley argued that Nvidia is simply exploiting its technological advantage to increase profits and gain market share, rather than engaging in anti-competitive behavior. In his view, trying to fine, break up, or slow down Nvidia will only hinder the development of AI.

“What we need is some good old-fashioned innovation,” Beckley claimed. “You know, other companies have come out with competing products and technologies that are starting to take some of the investment away from Nvidia.”

Potential Impact of DOJ Investigation into Nvidia

Experts say Nvidia could face significant challenges if the Justice Department’s investigation finds antitrust violations. But even if there are no violations, the chipmaker’s operations could slow down, at least a little, because of the probe.

“When the Justice Department is monitoring someone, it slows things down,” Morehead said, likening it to putting little bits of sand in a gas tank. “You have to have a lawyer who approves your allocations. You have to have a lawyer who approves your pricing. You have to have a lawyer — in meetings where you normally don’t have a lawyer.”

Nvidia could also be forced to open up its CUDA software platform to competitors in a worst-case scenario, increasing competition. “Apple had to open up the App Store, Microsoft had to open up its API with Internet Explorer, and it’s likely to be the same, which would allow AMD, Intel, and others to benefit from CUDA on an equal footing,” Moorhead explained.

If the Justice Department can prove that Nvidia acted illegally, it could face hefty fines, too, and not just in the United States. “I think this case will spread to the EU, Korea, Japan, maybe Taiwan — maybe not China — which increases the scrutiny,” Moorhead said. “But basically, it’s a fine.”

However, neither Moorehead nor Beckley believe these fines will significantly impact Nvidia’s business, largely due to the company’s superior technological advantage and growing revenue. The experts also noted that it will take months, or more likely years, for the DOJ investigation to conclude.

“By the time the case comes to a conclusion, whatever that conclusion may be, the money will have been made by Nvidia, so any fine that the company might impose will essentially be pocket money,” Beckley said. “I don’t think that this fine will have any tangible impact on the company, its earnings, its financial position.”

Beckley doesn’t see the Justice Department’s case as likely to succeed, despite investor backlash over news of the investigation. “I don’t really see any path for them to come up with any kind of real anti-competitive ruling,” he said. “I don’t think that’s going to come up very often.”