Nvidia has continued to lose vast swathes of its graphics chip market share, dropping a further 3% in the first quarter of 2011 to 20%; down from 28% this time last year. The decline, which is closely linked to Nvidia’s decision to pull out of the chipset and integrated graphics processor (IGP) market, resulted in AMD gaining 3% in 2010, giving it 25% of the market, and Intel — the behemoth that it is — picked up a full 5% in 2010 to reaffirm its domination of the market with a 55% share.

In 2009, Intel pulled the plug on Nvidia’s rights to produce chipsets and IGPs that could communicate with its Core iX (Nehalem) chips. Nvidia was already on its way out of the chipset market — the GeForce 320M was its last offering — but Intel sealed the deal. A vicious court case ensued — there was a lot at stake for both companies — and a settlement was finally reached at the beginning of 2011. Intel had to pay Nvidia $1.5 billion — but in exchange, Nvidia lost all rights to use Intel’s DMI and QPI technologies, and to the x86 processor architecture.

But that’s all right: With Tegra, Tegra 2, and the upcoming Denver (Tegra 3) system-on-a-chip, Nvidia is fully invested in ARM. While the first iteration never really took off, Tegra 2 is the platform that most 2011 Android tablets will use. Tegra 3, when it’s released, will feature a quad-core CPU, a 12-core GPU, and hardware decoding of 1080p video. Furthermore, Nvidia has just bought baseband specialist Icera for $400 million, which means a Qualcomm-like all-in-one smartphone chip will almost certainly appear in 2012. With so many baked-in features, Tegra definitely makes for an appealing smartphone and tablet chip — which is fortunate, as its raw processing power is comparable to a 4-year-old Intel Core Duo chip.

In other news, Nvidia still maintains a 60% share of the “prestige” desktop graphics card market, and shows no sign of losing any further ground to AMD/ATI — but that’s not necessarily a good thing. The discrete graphics processor market — graphics cards for desktops and laptops — is a bad place to be right now. PC sales are slowing, video games consoles have usurped PCs as the de facto platform for gaming, and the gap between discrete and integrated solutions is shrinking. Sales-wise, the next big boost for discrete graphics processors won’t come until the next-generation Xbox and PlayStation — and even then, it wouldn’t be surprising to see those consoles use integrated solutions instead.

The fact is, Nvidia’s best-in-class graphics technologies are a world apart from low-power and low-cost requirements of contemporary computing. GPUs have billions transistors, complex architectures, and huge physical and power footprints — the exact antithesis of Nvidia’s Tegra ARM chips. There’s no doubt that Nvidia can apply some of its graphics expertise to the mobile sector, but not to the extent that it has a significant edge over PowerVR or Qualcomm offerings. Nvidia, in other words, is almost diametrically split between its super-charged GPUs and the low-power, ARM-based Tegra platform, with neither department being particularly helpful to the other.

Nvidia, which had just found its x86 feet, seems to have gone all-in with an emerging and unproven technology; Nvidia, a graphics chip company, is betting everything on a platform that it has almost zero experience with. Not happy with competing against the giants of AMD and Intel in the IGP market, Nvidia has instead decided to compete in a battle that is fast shaping up to be one of the most viciously-fought wars in silicon history. For the sake of PC gamers who want to play Crysis 3 at max resolution and 32x antialiasing, let’s hope Nvidia’s gamble pays off.