There's a moment in NVIDIA CEO Jen-Hsun Huang's recent interview with Charlie Rose, where the graphics exec holds up a card-sized Ion board and, after pointing out for his interviewer which of the board's two chips is Intel's Atom and which is NVIDIA's 9400M, he says, "This is where the computer industry is going." Unfortunately for NVIDIA, he's exactly right, and in two respects: 1) smaller and cheaper have replaced same-sized and faster in the hearts and wallets of the world's chip customers, and 2) a CPU plus a GPU is still the future of computing. I say "unfortunately," because number one means painfully shrinking profit margins on all categories of semiconductors, and number two means that Intel is still the guy in charge of doling out seats on the last lifeboat left (i.e. the netbook) after the PC industry hit an iceberg in the fourth quarter of 2008.

And so it is that NVIDIA, which just announced that it saw an astounding and sudden 43 percent quarter-over-quarter drop in revenues in the fourth quarter of last year, is left to make the case that Atom and the 9400M belong together, like Leo and Kate, in the smaller/cheaper semi market that will be all that's left when the PC market as we knew it for 25 years has finally slipped beneath the waves.

By implication, this means that NVIDIA and Intel belong together, which is why the GPU maker has to walk a very fine line in its efforts to ensure that it isn't locked out of the mobile future and forced to wait for the high-margin, performance-oriented core of its present business to recover.

But the present economic troubles have forced Jen-Hsun's company into a critical juncture, where there is no margin for error and the consequences of failure are enormous.

A world of hurt

Jen-Hsun told Charlie Rose that, "20 percent, maybe 30 percent, of our business goes toward hardcore gamers." My own suspicion is that the number is even higher. NVIDIA's most expensive, highest-margin parts are its high-end discrete GPUs and the supercomputing-oriented Tesla line that's derived from those GPUs; the latter just started shipping for revenues last year, and is a miniscule part of NVIDIA's bottom line. The medium-term prognosis for both of these segments is grim if the still-accelerating downturn continues, and it will continue.

But even within the mobile space, which fared less poorly than the desktop space, there was nowhere for NVIDIA to hide in the fourth quarter. The company's revenues were down 60 percent year-over-year in the fourth quarter of 2008, and every segment of the company's business saw red. Here's the breakdown given by NVIDIA CFO Marvin Burkett on the earnings call yesterday:

The weakness in demand for the fourth quarter was across the board. Compared to Q3 the GPU business was down 47%; the Professional Services business was down 44%; and the NCP business was down 51%. There were no safe havens. Within the GPU business desktop was down 34% as we believe we regained some market share particularly in the high end, but the overall high end market was very soft. Notebook was down 63%, reflecting the buying trend toward low end systems with integrated graphics. Memory was down to $7.2 million for the quarter from $22.3 million the prior quarter. All of this was in the environment of the channel depleting inventory.

Burkett is describing a world of hurt in which buyers in all segments fled the one factor that is at the core of NVIDIA's entire business case: performance. This situation makes NVIDIA's attempts to get the 9400M + Atom combination off the ground all the more critical to the company's future. But Intel could be making things difficult.

Pay to play?

Burkett is describing a world of hurt in which buyers in all segments fled the one factor that is at the core of NVIDIA's entire business case: performance. This situation makes NVIDIA's attempts to get the 9400M + Atom combination off the ground all the more critical to the company's future. But Intel could be making things difficult.

There have been rumors for a while now that Intel is somehow working against the Ion platform, rumors that Intel vehemently and officially denies. The company has thrown up no roadblocks, it claims, to the use of Atom with the 9400M, and anyone is free to buy an Atom processor on the open market and pair it with anything they like.

I'm certain that Intel is telling the truth here, but I've been following the company for a decade and I know that it has more than one way to lock out a competitor.

During the height of the Intel vs. AMD wars, when AMD's K7 and K8 were successfully stealing Intel's server and desktop marketshare, Dell's outright refusal to consider AMD processors in any part of its lineup was a very obvious red flag that something was up. And what was up was an open secret in the industry: Dell got major rebates from Intel on its processor purchases, nominally in exchange for its marketing partnership with Intel, but there were also allegations that Dell's keeping AMD out of its computers was also part of the package.

In other words, Dell allegedly bought Intel processors and chipsets exclusively, and in return got part of its money back through Intel's marketing development fund.

It's entirely conceivable that some sort of MDF-based rebate arrangement is at the heart of the Ion issue. Intel tells me that Atom is not part of the "Intel Inside" marketing program, so the exact rebate mechanism would have to be different than it was in the Dell case, but there could still be something there that makes it effectively more expensive to just use Atom alone, without the accompanying chipset.

I must caveat all of the above with the following: the Intel-Dell arrangement that I described has never officially been confirmed that I know of. It was always more of an "open secret" sort of thing, so it is technically just a rumor; this means that my take on the Ion situation is speculation based on rumor. So, caveat lector.