Intel Buys Peace of Mind, Again

The irony was unmistakable. On the same day that {complink 103|Advanced Micro Devices} replaced its president and CEO, Dirk Meyer, {complink 3926|Nvidia Corp.} announced it struck an agreement “ending all outstanding legal disputes” with {complink 2657|Intel Corp.}. (See AMD Dumps CEO, Starts Search for New Head and Intel in Patent Accord With Nvidia.)

Nvidia will get $1.5 billion to end the dispute and agree to a cross-license patent agreement with Intel. The agreement is reminiscent of a similar one AMD signed with Intel and raises the questions: How has AMD fared since? And what lessons can Nvidia learn from its graphics IC rival's experience?

The Nvidia transaction sets the world's biggest semiconductor company free to pursue its strategic objective of establishing a more formidable presence in what's shaping up to be the hottest segment of the IC market — wireless devices, including smartphones and tablet computers. By paying less than one-tenth of its cash and short-term securities to Nvidia, Intel eliminated a potentially nightmarish legal tussle and, for now anyway, curtailed the ability of federal regulators to poke around in its affairs.

Nvidia may not derive as much long-term satisfaction from the deal, although it probably had no other viable option but to settle with Intel. On the positive side, the cash it is getting from Intel can be invested directly into R&D or for other strategic marketing operations, including product development for new sales opportunities. Nvidia has almost no long-term debts — $23.4 million at the end of it last fiscal quarter — and did not make the deal for monetary reasons alone.

However, Nvidia is also a troubled company whose sales have been sliding due to pressure on its core graphics IC business from rivals AMD and Intel. Nvidia's sales in the fiscal third quarter ended Oct. 10, 2010, were down 14 percent, to $843.9 million from $982.5 million in the previous year's third quarter. For the current quarter, analysts forecast sales will continue to slide, falling approximately 11 percent to $879 million from $983 million in the comparable quarter of 2010. The cash from Intel is good, but what Nvidia needs right now is a significant sales boost, and that will only come from having competitive products. That's a problem it shares with AMD.

What's the other connection between AMD and Nvidia? They were both fighting the same company, which has now bought them off after first clobbering and weakening them in the marketplace. In November 2009, Intel agreed to pay AMD $1.25 billion to end all legal disputes between them. AMD had filed complaints against its microprocessor archrival on three different continents and seemed to have regulators in Europe, Asia, and the US queuing up to help it knock the stuffing out of Intel.

The payout hardly dented Intel's bank account, and within a few quarters the company had rebuilt its cash hoard. Further, by ending the litigation, it gained the freedom to refocus management attention on pressing structural alignments required to establish a presence in the wireless market — and, of course, it continues to wallop AMD in the microprocessor segment. In December 2009, Intel reported approximately $14 billion in cash and short-term investments, but less than one year later, when it posted September quarter results, this had grown to $20.8 billion. With cash like that, you can silence most enemies.

Meanwhile, AMD has remained more or less in the same hole it had been pushed into during years of savage competition with Intel. Its cash and short-term investments swelled up to $2.7 billion at the end of 2009 but were down to $1.7 billion by the third quarter of 2010. (Long-term debts fell more than $2 billion during the same period, though.) In the capital-intensive semiconductor market, AMD's limp would have been more pronounced had it not received the money from Intel.

Nvidia may soon find itself in the same precarious position. Intel will pay the $1.5 billion over five years, and the companies will sign a comprehensive cross-license deal to resolve their disagreement. Intel's goal was summed up in the press statement announcing the transaction. “This agreement ends the legal dispute between the companies, preserves patent peace and provides protections that allow for continued freedom in product design,” said Doug Melamed, Intel's general counsel. “It also enables the companies to focus their efforts on innovation and the development of new, innovative products.”

The combined $2.65 billion Intel has agreed now to pay AMD and Nvidia is a small sum to pay for this peace of mind, considering regulators around the world were beginning to more closely scrutinize its operations following complaints from competitors. Neither AMD nor Nvidia will now cooperate in any regulatory investigations into Intel's sales and marketing practices or dispute its rights to the patents covered under their agreements.

The winner here is Intel, the company with the most cash and the most to lose. With AMD and Nvidia feeding quietly from its cash trough, Intel can more intently focus on a more dangerous foe — {complink 444|ARM Ltd.}

11 comments on “Intel Buys Peace of Mind, Again

  1. eemom
    January 12, 2011

    Sounds like Intel is the big winner here.  I am surprised that Nvidia didn't negotiate more favorable terms considering all that Intel expects to gain from this.  It is hard being the David to Intel's Goliath, but each company has to look out for its own bottom line and hopefully Nvidia has a good long term strategy on how to best utilize the cash to continue making its mark in the industry.

  2. AnalyzeThis
    January 12, 2011

    While $2.65 billion isn't generally considered to be a “small sum,” I do agree with you: it's a small price to pay to resolve these issues.

    I also agree that Intel is the winner here… especially due to the fact that I really don't have a whole lot of confidence in either AMD or Nvidia, long-term.

    I think Intel stopped worrying about being overtaken by AMD sometime in the late-90's, and as for Nvidia… at the very least, they're going to have to re-invent themselves over the next few years due to the dramatic changes happening with the graphics IC business. Now, obviously they are doing some interesting things — the Tegra for example — but will they really have much of an impact in mobile? That remains to be seen. I'm doubtful.

    Like AMD, Nvidia seems to be past their prime. Like AMD, they were a big deal in the late-90's when GeForce first came out, but since then I think both companies have been on the decline. Now the financials may not back that opinion up, but I believe this to be a common perception.

  3. Barbara Jorgensen
    January 12, 2011

    Great analysis, Bolaji. It's still a staggering amount of money, but as you say, all is relative if you are talking about Intel.

  4. Anand
    January 12, 2011

    Though Intel is a big winner here, I feel NVDIA also got good deal here. As pointed out in the article, though NVDIA didnt had cash crunch immediately but decreasing sales were concern for NVDIA. I guess with this amount they can concentrate on more research work rather than worry about sales.

  5. Mydesign
    January 12, 2011

           Bolaji, a detailed analysis report and it’s very much informative also. In my opinion we have to take the matter in a different way, is this type of dealings are good for the industry? Doing something against the ethics of industry and trying to solve all issues and problem by the way of compensation.

           In my personal opinion, all this type of activities are going to end up with a money power show off and finally resulting in monopoly of certain brands. Companies have to look forward for doing things in the right way by organizing well in order to get peace, rather buying peace. Otherwise it will affect the existence of growing and startup companies.

  6. SP
    January 13, 2011

    well business is all about money and whoever has more dominates and sets the rules of the game. It would be interesting to see in future if Intel acquires or merges with many of these competitors.

  7. elctrnx_lyf
    January 13, 2011

    I'm not clear if this agreement between Nvidia and Intel is acceptable by the Anti competetion laws of ITU. But one clear sign we can see here is that Intel can be free with all litigations of Nvidia and they can actually concentrate for developing much better products for the future mobility devices. In this market ARM looks like going to play significant role with their recent high performance processors and mali gpu cores. I feel Intel is not treating AMD and Nvidia as its competetors anymore.

  8. bolaji ojo
    January 13, 2011

    Toms, Even the moral issues here are not clear. Intel is not admitting any wrongdoing and neither did Nvidia. Both companies are satisfied with the terms of the deal and obviously believe it is good for their operation. It may stink as far as the rest of the industry is concerned — but all we have to do is hold our noses — these companies have to deal with the realities of actual business environment, constraints, opportunities and long-term goals.

    Nonetheless, the issue you raised — that of overall industry well being — remains valid. Will this deal between Intel and Nvidia hurt consumers? That's a question for regulators but these companies cannot collude to hurt customers. It would be a problem for regulators to look into. However, deals like this tend to silence the little guys and startups but there's no better antidote against this than the best product in the market.

  9. bolaji ojo
    January 13, 2011

    Regulatory actions are typically initiated following complaints by a party that feels wronged. This was the case with the AMD-Intel anti-monopoly investigation. However, regulators need the assistance and cooperation of the rival to conduct a comprehensive investigation. By sealing the deals with AMD and Nvidia, Intel buys time to settle with regulators too and potentially has a stronger case for getting investigators off its back. If Nvidia continues to cooperate with or ask for regulatory investigation of Intel, this would probably violate the terms of its agreement with Intel — hence the lengthy payout term (five years).

    You are right. Intel does not see AMD and Nvidia as its main competitors anymore. They are peripheral to Intel's longer-term future. I am surprised it's taken the company this long to focus on the more problematic challenge posed by the ARM-led opposition. A

    RM itself is not the main problem for Intel, it is the group backing, supporting and deploying ARM technology. The challenge for Intel is that rather than have a single or two companies to focus upon as rivals in the case of AMD and Nvidia, now it has a hydra-headed group of companies. That's a lot to handle for a single company and Intel's deep pocket may not be of much help here.

  10. elctrnx_lyf
    January 16, 2011

    The best way Intel could beat ARM will be to form many collabrations like what it has done with Altera. To develop products that will be actually beneficial to the OEM's who want to make a prduct at low price. The FPGA and processor integrated device is only a first step and Intel should bet much of their dollars in such hybrid and customazible devices.

  11. hwong
    January 22, 2011

    Seriously. What is the rationale that Intel does not invest in RISC chips and let ARM take all that market share?  Is it because the company believes that the mobile market revenue will not justify for the investment?

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