Investors’ favorite AI play, Nvidia, has been on thin ice in recent weeks. Concerns about its rich valuation, new pressure from antitrust regulators, the sustainability of the AI boom, and the impact of the slowing U.S. economy have spooked even some of the chipmaker’s most ardent defenders.
Nvidia stock has dropped roughly 18% since Aug. 19, with the majority of the damage coming after a 9.5% plunge on Tuesday that erased a record $279 billion in market cap.
Just after the dark day of trading for Nvidia, Bloomberg reported that the U.S Department of Justice (DOJ) has ramped up its antitrust probe against the company. DOJ officials reportedly sent a subpoena to Nvidia, and other involved companies, which includes “legally binding requests that oblige recipients to provide information,” according to unnamed Bloomberg sources familiar with the matter. Subpoenas often precede the filing of a formal complaint against a company under investigation.
DOJ officials have expressed concern that Nvidia makes it difficult for its customers to switch to new suppliers and penalizes those that don’t exclusively use its AI chips, according to Bloomberg’s sources. The DOJ investigation into Nvidia began in July, The Information first reported, after similar allegations from competitors about Nvidia’s pricing strategies.
In a statement to Fortune, Nvidia said that it “wins on merit” and customers are free to choose whatever solution works best for them, adding that the company “scrupulously” adheres to all laws.
“We have inquired with the U.S. Department of Justice and have not been subpoenaed. Nonetheless, we are happy to answer any questions regulators may have about our business,” a representative added.
Still, the tech world’s issues with Nvidia’s tactics certainly seem to be widespread.
“All of Nvidia’s competitors have issued grievances with me. I’m not going to name them, but you can imagine who they might be,” Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, a technology analyst and advisory firm, told Fortune.
“Nvidia’s customers haven’t talked about any of these tactics, but they have talked about the desire to have—what words did they use—a more ‘balanced supply chain,’” he added.
Nvidia’s April acquisition of RunAI, which provides AI computation software, is also under the DOJ’s microscope, per Bloomberg’s report. There are concerns that the purchase will further strengthen Nvidia’s grip on the entire AI chip supply chain, making it more challenging for its customers to switch to competitors’ products.
Overall, Moorhead believes this could end up being “a very serious probe” for Nvidia, which could slow its business slightly, force the company to open up some of its software platform for use by competitors, or, eventually, lead to a significant fine.
“The reason I say that is first of all, technically, Nvidia is a monopoly. Second, AI is super important to society, economics, and business today and into the future. So it’s a super hot-button [issue]. And that means regulators are super motivated to do something,” he warned.
So, is Nvidia a monopoly?
Nvidia controls roughly 90% of the AI-critical next-generation chip market, and it has made big steps toward vertical integration in recent years, branding itself as not just a chip company but an “AI platform enterprise.”
The impressive market share gains and suite of both software and hardware AI offerings have made Nvidia a monopoly in the view of many experts, but the DOJ will have to prove more than just that.
“It’s not illegal to be a monopoly. It’s illegal—if you’re a monopoly—to squash competition and harm consumers,” Moorhead noted.
Tying agreements, where a seller ties the sale of one product to the purchase of another, are one of the ways Nvidia is allegedly abusing its monopoly power. These agreements, also called “tie-in” sales, are not always illegal, but can be challenged under four provisions of antitrust laws, according to the DOJ.
Both section one and section two of the 1890 Sherman Antitrust Act, which prohibit the “restraint of trade” and make it illegal to “monopolize,” can be used to challenge tying agreements. Similarly, the DOJ could rely on section three of the 1914 Clayton Antitrust Act, which forbids acts that will “substantially lessen competition,” or section five of the 1914 Federal Trade Commission Act, which prohibits “unfair competition.”
Jim Keller, CEO of AI chipmaker Tenstorrent, an Nvidia competitor, told The Information in August that Nvidia’s sales tactics are not illegal, in his view, but he admitted customers often “feel pressured to buy Nvidia’s networking gear to guarantee themselves access to the company’s vaunted AI server chips.”
While the DOJ is investigating claims of tying agreements, they will likely have to prove that the tying was done with official contracts, rather than merely “pressure.”
But that may be difficult to do, according to Scott Bickley, practice lead and principal research director at Info-Tech Research Group, a tech research and advisory firm. He noted that semiconductors have always been dished out on allocation schedules, with contracts both parties agree to in advance, and Nvidia isn’t being accused of breaching any contracts.
“Of course, they’re going to try to sell their gear—which they will probably say is more compatible, that you’ll get a better quality experience if you run Nvidia chips with Nvidia racks and things like that. But to my understanding, and from what I’m hearing, they haven’t forced that. They’re heavily encouraging it, but they’re allowing their biggest customers to utilize their own gear and their own hardware for their data center designs,” he explained.
Bickley argued that the tying agreement beef is largely a jockeying match for pricing between Nvidia and its very influential and powerful big tech clients in a space with little to no serious competition.
“I don’t think Nvidia’s doing anything—that I can see, at least on the surface—that would be breaking the law,” he said. “I think they’ve just become the 800-pound gorilla in a space where there’s not any other 800-pound gorillas to fight them off at this point.”
The potential use of exclusionary rebates is likely another reason the DOJ could be investigating Nvidia for antitrust violations. “[Those say] I’m only going to give you this good price if you don’t buy the competition. It’s not volume-based pricing, it’s exclusionary-based pricing,” Moorhead explained, noting, “You can’t do that if you’re a monopoly.”
Nvidia’s software platform CUDA might also be under the microscope. CUDA is used in everything from low-level drivers to generative AI models, and it isn’t open to competitors like AMD or Intel to use.
“Now, if you’re not a monopoly, that’s fine. If you have monopolist powers, people might look at that and say, well, ‘You’re more in the marketplace business, right?’” Moorhead said, explaining: “In that case, you have so much power you have to open this up, even if it’s [to] your competitors.”
Still, Bickley argued that Nvidia is simply utilizing its technology advantage to increase profits and gain market share, rather than engaging in anticompetitive behavior. Attempting to fine, break up, or slow Nvidia would only impede the development of AI in his view.
“What we need is some good, old-fashioned innovation,” Bickley argued. “You know, have some other companies come out with competing products and technologies that start to siphon away some of that investment from Nvidia.”
The potential impacts of a DOJ investigation on Nvidia
Nvidia could face significant challenges if a DOJ investigation finds antitrust violations, experts say. But even if there aren’t any violations, the chipmaker’s business operations could be slowed, at least slightly, by the investigation.
“When anybody has the Department of Justice looking at them, it slows things down,” Moorhead explained, likening it to putting small bits of sand in a gas tank. “You have to have a lawyer approve your allocations. You have to have a lawyer approve your pricing. You have to have a lawyer—in meetings that you normally wouldn’t have a lawyer in.”
Nvidia could also be forced to open up its CUDA software platform to competitors in a worst-case scenario, leading to increased competition. “Apple had to open up the App Store, and Microsoft had to open up its API with Internet Explorer; this would likely be something like that, which would enable AMD, Intel, and others … to tap into CUDA on an equal basis,” Moorhead explained.
If the DOJ is able to prove Nvidia acted illegally, it may need to pay heavy fines as well, and not just in the U.S. “I do believe that this case is going to spread to the EU, Korea, Japan, and likely Taiwan—probably not China—which, again, just makes the scrutiny even higher. But essentially, it’s paying a fine,” Moorhead said.
However, neither Moorhead nor Bickley believes these fines will dramatically impact Nvidia’s business, in large part owing to the company’s distinct technology advantage and surging revenues. Both experts also noted that it will take months, or more likely years, for the DOJ’s investigation to conclude.
“By the time it comes to a conclusion, whatever that conclusion is, the money will have been made by Nvidia, so any fine that they put forward will be basically pocket change,” Bickley said. “I don’t think it will have any material impact at all on them and their earnings and their financial position.”
Bickley doesn’t see the DOJ’s case as likely to succeed, either, despite investors’ negative reaction to news of the investigation. “I don’t really see a path for them to come up with any type of true anticompetitive judgment,” he said. “I don’t think it’s going to come up much.”
