Acting as a "Jack of All Trades" for PC Games, Standing on the Shoulders of Customers
2002 was an unforgettable year for Jensen Huang. NVIDIA's stock price plummeted 90%, and his personal wealth shrank tenfold, falling from the "billionaire" category back to the "multi-millionaire" ranks.
This was due to the cancellation of orders by major customer Microsoft. At the time, NVIDIA was collaborating with Microsoft on the Xbox gaming console project. Microsoft demanded lower GPU prices, but NVIDIA refused, leading Microsoft to terminate the partnership. This contract accounted for nearly 70% of NVIDIA's annual sales, and after the collaboration fell apart, NVIDIA's revenue rapidly declined, and its market value significantly shrank.
Huang had no choice but to compromise, agreeing to "reduce future costs for Xbox." However, six years later, when faced with the "GPU-gate" incident where Apple, Dell, and HP collectively canceled orders due to issues with the GeForce 6000-9000 series chips, causing the stock price to plummet 95% again, Huang chose to confront customers head-on.
He downplayed the problem of GPUs causing computers to overheat and burn out, and later even rejected Apple's proactive request for customized cooperation.
These two starkly different attitudes largely stemmed from a shift in bargaining power.
In the early 2000s, during the console era, game console manufacturers controlled the "traffic entry point." Giants like Sony and Nintendo handled everything from game publishing to operations, leaving chip suppliers at their mercy. Even though NVIDIA pioneered the GPU concept and led in the graphics card field, it couldn't escape the fate of being "made or broken" by customers.
After falling out with Microsoft, NVIDIA missed out on Microsoft's new DirectX9 specifications, causing their newly launched GeForce FX to be incompatible with Microsoft standards. Combined with the product's immaturity, sales were dismal. Meanwhile, ATI, which had Microsoft's support, launched the more powerful Radeon 9700, quickly rising in the GPU market. In the third quarter of 2004, ATI held 59% of the discrete graphics card market share, while NVIDIA had only 37%.
However, with the rise of the PC gaming market, the console manufacturers' monopoly on the "traffic entry point" was broken. The PC gaming industry leaned more towards a model where "game developers run freely, and hardware companies chase desperately," with separate roles for R&D, publishing, hardware, and software. This meant that potential customers for chip manufacturers expanded from a few console giants to various aspects of the industry chain.
From 2004 to 2006, NVIDIA's revenue continued to grow, but the proportion of revenue contributed by the top five customers steadily declined. At the same time, graphics card technology drove the realization of "true 3D," and the popularity of PC online gaming, fueled by network and broadband proliferation, placed higher demands on chip capabilities across the industry chain.
On the consumer end, for example, visually stunning 3D games became "PC killers," forcing players to constantly upgrade their equipment and compelling PC manufacturers to choose more powerful chips. The globally popular game "Crysis" in 2007 was known for its realistic graphics and high configuration requirements. NVIDIA's GeForce 9800GT graphics card, which could run the game smoothly, became extremely popular, selling over 5 million units worldwide.
Compared to the console industry, upstream PC gaming companies only needed to balance performance, yield, and price to let their products speak for themselves, without having to be subservient suppliers. Since 2004, NVIDIA's GPU model of "doubling performance with each update while continuously reducing prices" has dominated the PC gaming market.
However, chip giants like Intel and AMD also set their sights on this market. AMD even announced a merger with ATI in 2005, aiming to dominate the industry through the combination of CPU and GPU. But ATI's purchase of outdated GPU patents to fetch a good price not only left AMD heavily in debt but also slowed down the GPU integration process, causing AMD to fall behind in the rapidly iterating chip industry.
The competitors' setbacks delighted NVIDIA. As Huang said, "It's like a gift falling from the sky; we've become the world's only independent graphics chip company."
With its technological lead and dominant position, NVIDIA gained the ability to stand up to customers. Dell and HP, who had canceled orders during the "GPU-gate" incident, placed new orders when NVIDIA launched new products. Apple, which had turned to AMD with unsatisfactory results, had to restart cooperation with NVIDIA.
However, before Huang could rejoice for long, a new crisis was quietly approaching.