Nvidia faces first regulatory scrutiny for dominating the AI chips market

• French authorities have been interviewing market players on the critical role Nvidia plays in AI chips.
• Even the European Commission has started looking into Nvidia’s price policy, the current shortage of chips, and its impact on prices.
• The initial investigation may not lead anywhere, but may encourage further scrutiny of Nvidia and its dominant role in AI chips.

2023 is definitely an important year for Nvidia Corp — the computer chip designer that has joined tech giants like Apple, Amazon, Alphabet, and Microsoft in the elite club of US companies valued over US$1 trillion. The AI boom, led by OpenAI’s ChatGPT, has led to Nvidia supplying most of the world’s AI chips while achieving unprecedented growth quarter after quarter.

Although AI has been around for many decades, the sudden and profound impact of ChatGPT dramatically changed the dynamic of the market — especially for Nvidia. In less than ten months, the California-based chipmaker achieved dominance by becoming a one-stop shop for AI development, from chips to software to other services.

Everybody builds on Nvidia first, and if a company comes out with a new piece of hardware, it simply means they are racing to catch up. But only a handful of companies, including AMD (Nvidia’s main rival in the market for graphics processing units (GPUs)) and Intel, have come close to having a slice of what is indisputably Nvidia’s pie. 

Today, Nvidia dominates an overwhelming 95% of the AI chips market, which leaves even prominent players like AMD and Intel with minuscule market shares of below 10% individually. And it’s not that Nvidia is dominating the market by force; it is able to dominate because no other players have as yet come close to matching performances with Nvidia’s hardware. 

The authorities in the European Union are unable to turn a blind eye to a company dominating an entire industry. In fact, the bloc’s antitrust enforcers actively monitor and investigate anti-competitive practices to ensure a level playing field for EU businesses, while guaranteeing choice and fair pricing for consumers to encourage healthy competition.

Considering how Nvidia’s products today are virtually indispensable in the realm of AI, the European Commission has set its eyes on the company. After all, the stronger Nvidia grows in this area, the harder it becomes for companies attempting to build competing chips to get any kind of market share. 

The company’s GPUs, which first became popular in video games, are increasingly essential to new systems used to train large language models and other types of AI software. So much so that Nvidia’s supremacy in building AI chips has chilled other players within the industry. Unfortunately, such scale and influence have led Nvidia to face its first significant regulatory scrutiny – and it might face probes from more regulators in the future. 

France: The first country to investigate Nvidia

It all started when France’s competition authority said it had raided a company belonging to the “graphics cards sector” on September 27, without disclosing further details. People familiar with the raid told the Wall Street Journal (WSJ) that the operation had targeted Nvidia, which, as we know, is the world’s largest maker of AI and computer graphics chips. 

Based on the company’s website information, Nvidia has an office in France, at Courbevoie. “Raids do not presuppose the existence of a breach of the law,” France’s competition authority said in the statement, “which only a full investigation into the merits of the case could establish, if appropriate.”

Such raids are typically hours-long exercises in which officials turn up early, search a company’s premises, seize physical and digital materials, and interview employees who arrive for work. “The French authority said it had received approval from a judge for the raid,” WSJ stated.

What instigated a raid is the broader inquiry into the cloud-computing sector, in which the French authority cited concerns that players within the industry could use their access to computing power to exclude smaller competitors. For context, big tech, including Amazon.com, Microsoft, and Alphabet’s Google, leads the cloud computing sector, with large data centers in operation. 

Those cloud companies own tens of thousands of Nvidia’s chips, which were initially made to process computer graphics, but have become the computational workhorses behind the AI boom. In a report published in June, the French competition authority noted that “increasing use of AI will drive growth in demand for cloud services.” 

Without citing Nvidia specifically, the authority said that competition regulators must “ensure that established players do not hinder the development of smaller or new players” based on new cloud technologies. Despite news of the raid in France, two French companies announced deals to expand their offerings of Nvidia’s most powerful AI chips, the H100s. French telecommunications operator the Iliad Group said it was installing those chips in the heart of a Paris-area data center. 

OVHcloud, a cloud services company, said it would add H100s to the Nvidia processors it offers its customers for AI applications. But that has been the reality for Nvidia, especially in the last ten months. The company’s GPUs have become one of the hottest commodities in the tech world, with cloud computing providers struggling to get enough of them. 

The company has said that it is trying to boost the supply of its products as fast as possible to meet the surging demand. This year alone, Nvidia’s sales have surged, propelling it beyond a US$1 trillion valuation in June. By the middle of this year, analysts estimated that Nvidia would have a 90% market share in AI chips as it introduces newer, more powerful versions of the hardware.

France is not alone in probing Nvidia in the AI market

While the French authorities have been interviewing market players on Nvidia’s key role in AI chips, its price policy, the shortage of chips, and its impact on prices, the European Commission has initiated a similar investigation. People familiar with the matter told Bloomberg that the Commission has been informally collecting views on potentially abusive practices in the sector for graphics processing units.

The move is to understand if future intervention could be needed. The early stage investigation by the bloc’s antitrust enforcers may never result in a formal probe or penalties. If or when a formal EU antitrust investigation is launched, firms accused of violations face orders to change their practices and fines of as much as 10% of their global annual revenue.

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