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As early as August of last year Jen-Hsun Huang, NVIDIA’s CEO, said of netbooks, “that’s just not our target. I mean, there are a lot of things that are not our targets and that just happens to be one of the things that is not our target” (Earnings Call Transcript).

That was then. This is now. Since that time, the recession has turned global, netbooks are thriving like tubeworms at the bottom of the Atlantic, and NVIDIA’s CEO is singing a different tune. NVIDIA recently announced plans for Ion, which is Intel’s Atom processor combined with NVIDIA graphics, for netbooks. The buzz surrounding Ion is reminiscent of the first Centrino.

The Nvidian CEO recently gave a couple of interviews, which contain information that may be of interest to investors.

Ion

It did not take a great leap of the imagination to see Ion coming. NVIDIA has been contending for some time that graphics processors (GPUs) been growing in importance and that to get the most bang for your buck, system integrators could wed a less powerful CPU with a more powerful GPU.

When Intel brought Atom to market, it was natural to think of what might happen if one were to pair Intel’s smallest microprocessor with high-end NVIDIA graphics. Ion however does not use NVIDIA’s highest-end graphics chips but rather the same chip that is used in recent Apple notebooks.

Intel

When Ion was announced, it did not take long for the rumor mill to swing into action. About a week later, it was said that Intel would not allow Atom to be sold separately from Intel core logic (DigiTimes).

Intel quickly replied that this is not the case, “there is no exclusionary bundling in play” (InternetNews).

But what if Intel allowed Atom to be sold separately but charged a ridiculous amount? Of such speculation the NVIDIA CEO “brushed it off so far as rumors” (LAPTOP Magazine).

At this point, only one thing is certain; NVIDIA really likes Atom. “Intel’s Atom is a fabulous processor” (VentureBeat).

Atom

Management at NVIDIA and AMD–unlike NVIDIA and Intel–seem to communicate with one another, and I say this because they frequently say the same thing with a slightly different spin, and it seems improbable that such similarities of content originate entirely separately. Case in point, NVIDIA and AMD both say that they don’t see much difference between netbooks and other notebooks or computers, other than obvious differences in size and cost.

To this it must be pointed out that, though they may look similar, the hardware underlying netbooks is quite different than that of other Intel notebooks. The CPUs are based on entirely different architectures. Perhaps Intel has a point that the Atom CPU was designed for a different type of machine than a notebook.

AMD

AMD does not have a comparable chip to the Atom, so AMD hardware cannot as easily go into netbooks. That will not stop AMD, however, from trying to take market share from netbooks. The idea is pretty simple: prey upon the frustrations many feel using netbooks, win away their business, and offer most of what netbooks offer but with a larger screen and fuller PC experience.

NVIDIA’s CEO thinks that Ion, because of its strong graphics, would be competitive with such products from AMD that would try to take market share from netbooks, and that Ion would be better in some ways. The beefier CPU and GPU of AMD’s platform may trump an Intel netbook in sheer performance. The Ion, however: “That’s totally different” (LAPTOP).

Design Wins

So when might we expect to see netbooks based upon Ion? Don’t hold your breath. “Design cycles are typically less than a year” (VentureBeat).

Another processor investors should watch is NVIDIA’s application processor which is to power smart phones in conjunction with ARM processors and run a version of Windows CE.

Design cycles for smart phones or Internet devices with Tegra appear to be even longer than netbooks. It “typically takes a year or year and a half to get to market” (LAPTOP).

VIA Nano

AMD and Intel are not the only two companies to manufacture CPUs. There’s also a small company on the other side of the world which makes a CPU that targets low-power devices.

When NVIDIA announced Ion, it was assumed that NVIDIA was dumping VIA and the Nano processor. This appears to be inaccurate. NVIDIA is a processor-agnostic company and will make graphics for any processor, be it Intel, AMD, ARM, or VIA.

In fact, the CEO of NVIDIA said his company is a huge fan of the Nano and intends to include it in “our next-generation Ion platform” (LAPTOP Magazine).

While NVIDIA is CPU agnostic, NVIDIA has no intentions to enter the CPU market itself. To the CEO’s thinking, that would be like reinventing the wheel. “Why redo it?” (VentureBeat).

Fusion

AMD was the first company to announce that it was going to integrate graphics directly onto the CPU. AMD had scored a coup against its arch-nemesis Intel by integrating the memory controller directly onto the CPU. So, the thinking went, why not do it with GPU as well?

Such thinking may have seemed logical back then. However, it has become more and more likely that on-die graphics will never amount to more than a mainstream part and not the high-margin, high-performance part once hoped.

Technology moves too fast, and to integrate graphics on the CPU is to lock one into yesterday’s graphics for a period of 3-5 years. Said NVIDIA fellow David Kirk and chief scientist at the time: “A device with a mix of GPU and CPU cores would be a great product for the low end” (EE Times).

That being said, there may very well always be a place for affordable good-enough graphics, and such graphics may be integrated on the CPU. This is a space in which NVIDIA typically does not play, and the CEO’s response to on-die graphics was “That’s OK” (VentureBeat).

AMD’s Rich Uncle

Those who say that AMD could fold any day now seem to be unaware that AMD has an investor with deep pockets. How deep? Abu Dhabi recently invested $8.4 billion in AMD. That’s not a typo.

Apart from the backing from Abu Dhabi, AMD should be bankrupt right about now. Jen-Hsun’s take on AMD and Abu Dhabi is interesting. “They couldn’t have survived without the Abu Dhabi deal”.

Abu Dhabi doesn’t “want the microprocessor business. They don’t understand it. They want a manufacturing business”. Getting Abu Dhabi to invest in AMD was “a brilliant deal that saved the company”.

Is NVIDIA worried about Abu Dhabi’s deep pockets and their support of NVIDIA’s principal competitor? Not at the moment. Of AMD Jen-Hsun said: “We are miles ahead of them in GPU computing” (VentureBeat).

GPU Computing

NVIDIA is primarily known as a graphics company. However, the company has started to extend its graphics technologies beyond graphics to non-graphics applications. Applying a GPU to non-graphics workloads is known as GPU computing.

Not all applications lend themselves equally well to GPU computing. Most do not. However, for those that do, speedups are being seen sometimes by an order of magnitude in the hundreds. NVIDIA has been investing in GPU computing for quite some time, and GPU computing has, in the opinion of the CEO, “passed the tipping point” (VentureBeat).

Windows 7

The NVIDIA CEO appears to have done an about-face in regard to operating systems as well. Jen-Hsun used to be bullish on Microsoft Vista. “Any consumer will [enjoy] Vista”, he said way back in 2007 (F3Q08 Transcript).

There’s only one problem with that. Vista is too resource hungry to run on netbooks. This is a problem because netbooks are the fastest (only?) growing segment in the PC industry today. Enter Windows 7. “Windows 7 will go all the way down into the cheap PCs. Vista didn’t” (VentureBeat).

Brave New World

One thing that makes NVIDIA unusual in the current environment is the aggressiveness with which it is investing in R&D. The company is investing more not less. It is investing more, not just trying to keep expenditure of R&D level. Said Jen-Hsun: “I’m going to invest a lot more in R&D this year than I did last year — by a lot” (VentureBeat).

Foolish? Only time will tell.

The CEO contends that a lot of things will be different when this recession ends. It may be that all consumers will want is something that looks like a netbook but which is much more powerful. “I am prepared for that outcome” (VentureBeat).

If and when this recession ends, and the smoke clears, there will likely be two main chips inside netbooks, smart phones, and other Internet devices and computers. The CPU and the GPU. The CEO of NVIDIA: “I will have one of them” (VentureBeat).

Disclosure: long NVDA and INTC

It’s a good thing NVIDIA does more than just desktop GPU discrete graphics these days. If NVIDIA had never expanded beyond the desktop, the company would really be in a world of hurt. NVIDIA’s revenue share, for example, in high-end GPUs went from 80% to 30% from the second to third quarter (NVIDIA Corporation at Credit Suisse Group Technology Conference Presentation, December 2, 2008)!

High-end desktop graphics has traditionally been a high-margin business, with cards commanding $400-600 in prices. Not anymore. AMD recently released chips intended for the $200 and $300 markets, the Radeon HD 4870 and 4850. However, the $300 chip was good enough to take on NVIDIA’s $400 offering, and ATI’s $200 GPU NVIDIA’s $300 GPU. “ATI now had a $300 card that was competitive with NVIDIA’s brand new $400 GTX 260“.

A price war ensued. There went the margins.

The pricing of the card above the $200-400 cards in the GPU hierarchy was even affected.

Today cards that originally cost around $300 and $400 can be had for little more than $200. Amazing.

While price wars are good for consumers, they can be bad for margins. Make no mistake. The smaller AMD chip costs less to produce than the larger NVIDIA chip. Nevertheless, the fact that AMD’s ATI graphics division has yet to return a net profit argues that ATI’s GPUs are not making that much money.

Likewise, NVIDIA’s desktop margins are under pressure. High-end GPUs have traditionally been a high-margin business for NVIDIA and chipsets a lower-margin business. Yet the CEO was recently asked if “chipset gross margins right now are greater than your desktop gross margins”, and the CEO replied, “Yes, they are close“.

AMD’s current company-wide strategy is simply to return to profitability. The company’s gross margins are such that all they have to do, to achieve a net profit, is get their sales up. It should happen eventually, though it doesn’t look like it’s going to happen this quarter. Consequently AMD is presently trying not so much to push the envelope of technology, or to expand the overall CPU or GPU markets, as it is trying to take market share from what’s already out there.

One area where AMD would love to take market share is the incredibly lucrative area of professional workstation graphics. This space is practically owned by NVIDIA, which in the third quarter had “90% of overall units” and enjoys gross margins of around 70% (Credit Suisse Conference, 12/2/08).

I don’t see how a chip designed for the $300 price point, such as ATI’s, is going to scale far into the high end of professional workstation graphics. It seems that it would be more difficult to scale up a GPU than to scale down: to add to the complexity, than to simplify a design.

That being said, the reviews I have seen of ATI’s professional workstation cards have been good. We’ll have to see how this plays out. I always like a good fight.

Disclosure: long NVIDIA

3-core Phenoms, when they debut in the first quarter, will still not be clocked very high, and they are still experiencing delays. 8700, 8650, and 8450 triple-core Phenoms are not expected until the second quarter.

The B3 stepping is the chip revision that is supposed to correct the TLB erratum. Even the B3-stepping 3-core Phenoms will be slow. Phenom 8650 and 8450 “will have frequencies of 2.3GHz and 2.1GHz” (DIGITIMES).

The speed issue points to ongoing yield issues. This has little to do with the TLB (Translation Lookaside Buffer) erratum, which is a bug in the hardware.

Will the price/performance ratio of 3-core Phenoms cause Intel to slash prices its on its 4-core CPUs?

I don’t think so.

AMD’s 3-core CPUs are a good idea because they will allow AMD to increase its yields (by not discarding quad-core CPUs with underperforming cores). However, in order for AMD to successfully market 3-core CPUs, it will have to discount them at dual-core prices.

On a related note, while the slow speeds of AMD CPUs may have little to do with the TLB erratum, AMD is also rumored to be having TLB problems again. Problems are said to have to do with quad-core Phenoms, but what applies to quad-core Phenom should also apply to AMD quad-core servers.

According to motherboard makers, “the reason for the delay of 9700 and 9900 is because AMD has not yet been able to solve the translation lookaside buffer (TLB) erratum” (DIGITIMES).

Read more here and here.