HP pays half for Nvidia's graphic problems
WE KNOW THAT HP, Dell and every other PC maker out there is having graphics chips fail at alarming rates due to defective Nvidia chips, but who pays in the end? The users in everything other than money, but the cash cost is evenly divided between HP and Nvidia.
According to people close to the agreement, Nvidia has agreed to shoulder half the costs that HP sees, and that is averaging about $150 per incident. Someone doesn't want this information out, and anyone close to it is being shut up.
This brings up two questions, why are people not talking when it is in their best interest to talk, and how much could this cost in the end? Both have unpleasant answers.
The talking part is the most puzzling, if you look at HP and Dell, they are getting their posteriors reamed by their best customers. We will tip the hat to Dell for leaving the comments up there, they are taking quite a severe beating. HP is taking one as well, just not as publicly, and with far less direct control, as it is off their servers.
It is costing them about as much in dollars as it is reputation. If you recall, the initial NV hit on this was $150-200 million, and the OEMs pay half of that, depending on who they are. This means they take the same hit collectively, likely mostly shouldered by the big three (Dell, HP, Lenovo), meaning tens of millions per company.
So, the companies are being bled to the tune of eight digits and getting kicked in the sensitive parts as a thank-you. The one way they could clear the air is to say "We got a batch of defective chips from Nvidia, we are sorry. This isn't our fault, but we will make it right". Easy enough, and they will have to do this eventually, either because of bad PR or lawsuits, but for some reason they are shutting up. Large corporations are not known generally for masochism, especially when there is an easy out with most sides winning.
But they are not doing it. Makes sense, right? No, it doesn't, and there is only one good reason for this to happen, they are being shut up. Think about it, ten or so affected OEMs (Dell, HP, Lenovo, Apple, Asus and others), and no one is giving anything other than the same stupid corporate line about BIOS updates and thermal management.
What do all these OEMs have in common? Nvidia. We have not seen any hard documents on this, but the behaviour of the OEMs simply screams contractual gag. An educated guess here says the contract said something like "Nvidia out of the goodness of their hearts will pay half the cost if you guys shut up and bury this. If you don't, we will only pay for the bad chips". Now does the silence make sense?
That brings us back to why the OEMs are being so stupid. The PR hit they are taking, and the customers they are losing can't be worth the thin slice of $150-200 million they are getting. What we wouldn't give to see that contract, it will likely surface long before this whole mess is resolved though. The more heat you put on a pressure cooker, the harder it blows.
The second part may answer the why side a bit more, and that is money. Nvidia has only owned up to $150-200 million of this, and steadfastly refuses to list the affected parts. They claim it is simply a small batch of parts, and of those, there are only a small batch affected, and this is worth up to $200 million.
First a little mathematics, and for this estimate, we will be using very rough and round number to try and get an estimate of the magnitude of the problem. Exacting numbers will be left for the analyst community to pour over.
So, $150 per dead part, $150-200 million total. That means 1-1.33 million dead parts that they are admitting to. Small batch, our flabby posterior. Moving on, there are about 250 million computers sold worldwide per year, and about half of those are laptops. The bad chips, G84 and G86 among others, were sold for about 16 months, so 250 million / 2 * 1.33 = 166 million laptops or so in the time period.
Nvidia had about a 70 per cent mobile market share, and laptops have about a 30 per cent GPU attach rate. 166 million * .7 * .3 ~= 35million parts sold into laptops. Of that, not all are the officially 'affected' parts, several lines and older products don't have the same tendency for early death. Another educated estimate says about half the parts are potentially affected, lets call it 18 million bad parts. That would put the admitted failure rate at between five and eight per cent so far.
Using the high number of eight per cent and the low number of $150 million, we can figure out that the the total cost of a recall, again with NV paying only half, is around (100/8)*$150 million = $1.875 billion. Nvidia only has about $1.6 billion in the bank, so this could put a crimp on the decoration at the company non-denominational winter festivities party that does not endorse or disclaim any particular faith, religion, or point of view.
Basically, what it looks like is a recall could bankrupt Nvidia, even if they only pay half. They are quite desperate to minimise this and shut things up because they know what happens if it gets out. It is out, and why they keep continuing to pretend is beyond us, but that is corporate culture for you.
The OEMs? Well it looks like they got sucker punched. They likely agreed to shut up about this before they knew it would blow up in their faces. They took the easy money, and now are paying far more out the other side in terms of lost sales and customer ire. And here we thought the CEOs of those companies had a v ague clue, maybe not.
In any case, the numbers in the end don't lie. Nvidia is admitting responsibility by paying half of HPs cost, and getting twitchy about the cost of having to fix the real problem. Won't it be interesting to see how this ends up? And if Nvidia survives. µ
See Also
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Nvidia G84 and G86s are bad
Ten Dell models have defective Nvidia GPUs
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I think you left out one aspect, the long term view for OEMs. If Nvidia goes the way of the dodo, they are stuck with AMD/ATI and Intel. A reduction in players on this market will cause some troubles for the OEMs and they know it. So in the end they might just take the hit to keep on having a larger choice (and more leverage in price negotations) for the future.
At this point. 

We know nvidia screwed up. 

Period. 

Doesn't matter if the estimates are wrong or inflated.

Dell took care of my laptop but the gpu is still defective. 

GO ATI.
I'm stunned by the level of detail and your modesty about leaving the fine #'s to anlaysts. Truly this is a shining example of putting away personal biases and using cold logic and good old fashioned analysis to discuss a company.

So, I was blown away by your final estimate of the potential exposure 1.8 Bil. That is very scary and truly stunning. I was a bit confused if the 1.8Bil represented Nvidia's half or the total as you compared it to the cash on hand. If it was total then you should have compared 0.9Bil to the 1.6Bil cash on hand (which would not paint as nice a bankruptcy picture as you'd like it to)

So being the big picture guy I am, I looked at Nvidia's total revenue for for FY'07 and it was 4.1Bil... So basically you are saying that the total exposure is ~HALF of their TOTAL REVENUE?!?!?!? And if you are using the 1.8Bil to represent Nvidia's 50% share, that would imply $3.6Bil attached to notebook chips (or nearly ALL NVIDIA REVENUE!)? They do have revenue from non notebook IGP's right? Yeah I know you were doing the analysis for 16months vs 12 in the FY #'s - I'll let you do the math... but the 'analysis' is still just as flawed.

"Basically, what it looks like is a recall could bankrupt Nvidia, even if they only pay half. "

This is just crazy talk... Charlie I know you hate Nvidia, but don't we have enough hacks on this site who do bad analysis to validate their personal agendas and hope the average reader is just too stupid or too lazy to realize how bad the analysis is?

EVEN if you're #'s were right (which is a huge if as your analysis has many flaws in the #'s) how could a $0.9Bil charge bankrupt a company with 1.6Bil in cash/short term equity? 

Please go back to bashing the company, the products and especially the CEO (they deserve it on those fronts), but leave the financial analysis to people who have a clue.

Next thing you know you'll have AMD dancing in the aisles about a 3 GHZ part and Intel developing a second 45nm process because the initial process was so bad. Oops, my bad, you already spread those rumors!
Your analysis of Nvidia's financial state is a bit alarmist. Even assuming your calculations for expenses relating to defects, Nvidia can free up over 150 million dollars of cash each quarter by suspending its buyback program and an additional 300-400 million each year by not acquiring any companies or expandings its facilities. Also, given that it has no debt, it could raise several times its $1.0bln dollar EBITDA in the debt markets - even given the credit crunch.

Nvidia is here to stay.
A good design verification plan should have caught this before the product reaches GA.

Why did all of these big OEMs not find this weakness before the products being release for general availability?
Did they test with earlier revision parts? Still DV tests should be done on shipping level components.
Dude, a thought just occured to me... The desktop G84 and G86 could be the ultimate planned-obsolence parts: a customer gets a card that is GUARANTEED to fail in about 1-3 years after the warranty expires. THAT is the fulfilled wet dream of gpu and card manufacturers. 3-5 years after purchase it would need replacement anyway, still some "stupid" customers would stubbornly continue to use those products for up to 5 more years. This way? they MUST buy a new part, better yet - a new whole computer, get the damn Vista on it while you're at it, you can't get XP normally anyways and you're gonna use it for games, right? In the end, the world is better, consumers are spending, the numbers are up, [almost] everyone is happy. So stop yapping about that faulty desktop chips, it's actually GOOD THING they fail.
To everyone, keep staying on top of these guys! Write e-mails, post on their forums, post on all the forums, just get the word out that this isn't acceptable. 

This is some crap that they're trying to get away with and they will if we don't all step up and tell them they can't do this to us!

Keep on them Charlie, we appreciate what you're doing!
protect share prices until the senior exec's notification period has passed and they can dump some shares before the price drops.

And the longer this is delayed and denied the more chance that these defective laptops will be out of their warranty period. The companies pay out less immediately, and probably over the long term.

Has anyone else noticed the number of refurbished nvidia gpu based laptops on many retail and etail shop websites?

PC World actually has a whole section in the Laptops area called "Refurbished Laptops". Check them out. 15 pages with 10 on each page, that's a lot of laptops. I wonder if they're so keen to push exrtended warrantys on these laptops!
I have followed this story with interest and like Charlies articles on Nvidia, even if he didnt tell me my GTX260 cards would drop like a stone in price after one week due to those pesky 4870 doodars. What is going on ? I sense the whole issue is 50/50 here. I think the chips arent a complete dead loss and just dont like running at 100 degrees in badly cooled notebooks. GPUs used to blow regulary in desktops when going over 80 degrees. Packaging has been improved a bit these days but these old 8600s must be old school jobies that dont like boiling water. The manufacturers must feel a bit of guilt for letting these chips overheat in badly cooled slim notebooks with a cooler that looks like a toothbrush. Maybe Nvidias thermal specs were bullshit but if everyone had fat telephone books with decent coolers this never would of happened lol. I have a big fat Clevo 2 inches thick and it is still going, probably cos I cant be arsed lifting the beast onto my desk !
it makes you wonder what drives this guy?
And also his reasoning:if his calculations were right nvidia would go bankrupt simply because their cash would be gone...?
The tabloids should limit themselves bringing up news about spears and hilton...cause otherwise they simply look stupid...
Hey Charlie,

I admire your consistency and credibility that comes from numbers and intelligence.

I am shocked no NV fanboi responding in their usual fashion. Would that be because they are getting it finally?

Have nice weekend.
This is exactly what comes of letting your attorneys advise you and then following the advice. You abdicate running your company and doing what's right to a legal opinion from someone who could never run your company on their best day.
Just do what's right and let the chips fall. That's what you use attorneys for - not for running your company.
I think you're missing part of the story here.

OEMs have already discovered that they can delay the onset of failure by changes to the BIOS that increase fan rates and apply a bit more cooling.

By delaying the onset of failure, they are fully aware that they will push the failure for a large number of these machines into post-warranty... and hence not need to cover them at all.

By being so apparently "pro-active" and issuing BIOS "fixes" to address the issue, some mfgs (who I won't name) are basically trying to wriggle out of the issue, as they know the majority of users don't extend their 12mth warranty.
(100/8)*$150 million = $1.875 billion
You say this is using 8% as the failure rate. Using your math that would mean a 100% failure rate would cost (100/100)*$150 Million = $150 Million.. So a 100% failure rate would cost less than this 8% failure rate? 

Surely it should read (8/100)*$150 Million = $12,000,000 (12 Million)
First off: Charlie, I do not know what the INQ is paying you, but your trademark no-holds-barred investigative raving is priceless (give the man a raise...he is a living INQ trademark)! He really does *sey-the-sooth*.
...
Neither I nor the other nVidia customers who were stung feel good about this, and the level of trust has certainly decreased for nVidia products (particularly on behalf of the OEM's that were REALLY stung). But I do hope that nVidia survives as a foil for AMD/ATI (although I personally will not be making risky purchases again). I am sure OEM's are aware of probable future sales patterns.
...
nVidia must have generated some Bad Karma when they were laughing at AMD's overextension for ATI (but at least AMD got something valuable for their debit) and when they were threatening Intel with their *Whoop-ass cannon* (which in their unfortunate haste to pull the trigger, seems to have been pointed the wrong way).

this is what happens when you care about your reputation, you have to do quality control. i have noticed a decline in quality control from every company lately, name no longer means anything any more, they all seem to be letting quality control go out the window in the name of cost. how much are you willing to sacrifice. in the end it looks like the quality control would have been cheaper than paying for their mistakes of letting a product launch that wasn't thoroughly tested.
I were the CEO of any of these OEMs, I would have told Nvidia to stuff it. It's your problem, you fix it.

I am a big fan of Nvidia graphics but not after this episode. I don't like companies that act in a manner that is blatantly dishonest.

Anyway your coverage of this has been excellent, I was about to spring for a Thinkpad T61 with the Quadro NVS 140 chip. But after discovering that it's based on the G84/86 core I'm getting a T60 with ATI graphics instead.

This article is trash. Nvidia on the verge of bankruptcy with 1.7 billion in the bank? Give me a break!

If that was the case then AMD would have been gone a long time ago considering the company is worth about 5 bil and in debt by about 3. 

Fortunately for nvidia they are smarter than AMD and actually have money in the bank.
AAPL: "What's wrong? Bad chippies? Bleeding moola? Come over here! Who needs a hug?"
NVDA: "Sniff...HP, Dell and Sony stole all of our lunch money...they opened our can of woop-ass on US!"
AAPL: "Don't worry (pat,pat), we'll give you lots more lunch money, just sign here, and I will take their woop-ass can openers away".
NVDA: "Sniff..but it says here that we are going to only make Apple-flavoured chippies from now on?"
AAPL: "Here, drink some koolaid. There, you'll feel better real soon. Here's your lunch money back".
NVDA: "My head is spinning...I feel like buying an iPhone...is everything going to be OK?"
AAPL: "Yes...yes...WE are going to be OK".
Wonder if it is connected to the Nvidia fiasco.

On the other hand I am sure Nvidia is oiling the OEMs with sweet deals on future parts as well . . .
Apple laptops do not contain NVIDIA graphics chips. They might one day (see appleinsider), but not yet.

HP may be doing good by some people, but I have one of there Pavillion DV9500 laptops with an GeForce 8600 that has failed. It isn't on their recall list, it is 7 days out of warranty and I have been on the phone with their customer support for two days getting no where. It took me 3 phone calls and talking to 5 different people to finally find someone to give me their customer complaint hotline, only one person even offered to escalate my call (one even flat out refused to let me talk to a manager). So they aren't even trying to do right by the customer, they are definitely loosing a customer here, and I will be telling all my family and friends to avoid them.
1) if nVidia goes bankrupt Charlie wins (and fulfills completely his life) and we'll all buy ATI (no choice!)
2) if nVidia doens't go bankrupt, Charlie won't write about nVidia anymore.

Deal?
They don't make the chips. I'd be surprised if they get stuck with 10% of the bill. Whoever MADE the chips is in pretty hot water. The rest of them (NV included) are just lessening the blow as much as possible, then will probably all sue the ACTUAL MAKER who should have caught this before shipping them to everyone.

Apparently Charlie has no clue that Nvidia is FABLESS. ROFLMAO. Translation:Unless it's a bad DESIGN, Nvidia isn't at fault at all. Since we all know it was bad SILICON, some manufacturer is about to get their butts sued off. Nvidia already stated VERY CLEARLY they will be suing for maximum damage, hopefully all of it. This should not be surprising. They didn't make them...LOL.

Nvidia isn't going anywhere. Sorry fanbois. But Charlie should be fired for his Nvidia rants. It's getting old. Not to mention complete BS usually. Charlie should go join fudzilla. That's all this is, FUD.
Where did the $150 replacement cost per part come from? Do the chips really cost Nvidia that much to replace, or is that the OEM cost?

If the replacement cost per chip to Nvidia is lower (say, $75 per chip), then the "admitted" failure rate would double, but the $150M figure would stay the same, so the cost of a full recall would drop to (100/16)*$150M = $940M.
Zero credibility. No facts in his writing. Wait and compare his bogus numbers with reality. National Enquirer is more believable than this idiot.
@ Lars Berntrop-Bos:

They don't? Then who is making the GeForce 8600M GT GPU in currently shipping Macbook Pros?

http://www.apple.com/macbookpro/specs.html
ALL Macbook Pro's have the effected 8600M GT gpu. Just sayin' ...
To the person who commented that because nV had $4.1 bn in revenues last year, I wouldn't doubt that much of their revenue could be from laptops and chipsets, since more people buy shelf models which are mid-range. World + dog != enthusiast. Also, my guess is that nV makes a killing on those parts, seeing as they're overpriced for the performance.

To the person touting math problems, charlie was calculating the cost for a recall, thus saying "so far, we have 8% of the products out there returned bad, how much would it cost us to take back all of them?" The math in the article flows... more or less correct, given the assumptions are correct.
Sorry to disagree with you, but my MacBook Pro would like to step outside and have a little chat about the GEForce 8600M GT that it has in its innards.
Hmmm... when I worked there (some years ago), I was told by a higher-up (who was not in my chain-of-command) that HP was having trouble with our chips. When I asked all of my contacts at HP about it, they'd not known of ANY problem. They even proudly showed me how well it was working. I relayed that back, and was told, "If you can't keep track of your customers, maybe you should just get out of the way."
I quit my high-paying job there because my supervisor didn't have the chutzpah to ask her who at HP had complained, or what the problem was supposed to be. I found out at my exit interview that I wasn't the first she'd pulled that on.
I trust that she was on top of this problem from the start and was screaming at one of her subordinates instead. But I doubt it.
I'm sure glad I'm out of that joint.
The Inq has truly plummeted into douche baggery. Are you done trashing nvidia yet?
Keep at it Charles. Don't let up for a second. When this whole thing blows up in their faces, NV and all their OEM partners are going to be getting their buts kicked over it. Stock prices will fall and Intel will very soon be making goo goo eyes and NV......
What an analysis!!!

Nvidia had about a 70 per cent mobile market share!!! You have got it all wrong. The motive? You only know.

Intel's market share in laptop graphics is 57% followed by NV at 23.6% followed by ATI at somewhere close to 18%.

This makes me think that your other figures might be be just as bad as this one. 

I mean it is very much possible that your other figures are just as big lies as the market share figure.

But unfortunately I only know the correct market share figure and couldn't verify your other numbers.

So let us keep your other numbers intact and redo the math:

166 million laptops * 23.6% NVIDIA share 

=39.1 million nvidia chips

assuming that 30% of them belong to the defective batches and further assuming that 50% of them are going to fail,

39.1 * 0.3 * 0.5 = 5.875 million chips

@ 150$ per chip, it comes to $881 million. And if NV pays half of it, it is $440 million. 

now given the nature of the article and the figures, i now kinda believe that nvidia might be right in estimating the losses between 150-200 million
If competition in this market means having players like Nvidia, then roll on the ATI Monopoly.

Personally i can quite do without arrogant companies like Nvidia churning out electronic mutton dressed up as lamb. With built in early life failure.


Really glad I bought laptops with ATi and Intel graphics chips LOL...

In any case we have a strict non nvidia policy across the board here, so for them to disappear we wouldn't care to much (might throw a party though!)
In France, more and more numerous users, notice that the nvidia revision graphics board A02 warms more and more in EasyNote MB or SB by Packard Bell.
Some people see artefacts of the others have a notebook which goes out directly.
By reading this article, it seems clear that Nvidia and the manufacturers with the retailers sold their stock with full knowledge of the facts.
It's cheaper to repair one by one pc discreetly rather than to announce this problem before Christmas 2006.
Strangely the new notebooks of Packard Bell, the EasyNote MT are delivered with a chip ATI HD Mobilitiy Radeon
So being the big picture guy I am, I looked at Nvidia's total revenue for for FY'07 and it was 4.1Bil... So basically you are saying that the total exposure is ~HALF of their TOTAL REVENUE?!?!?!? And if you are using the 1.8Bil to represent Nvidia's 50% share, that would imply $3.6Bil attached to notebook chips (or nearly ALL NVIDIA REVENUE!)?


I think you missed the point of what he was saying in the article. His point was that NVIDIA is agreeing to owe up to more than just the simple chip cost to compensate the OEMs. He did say in his article that he believed there were some contractual agreement that as long the OEM's shut up, nvidia would pay more than just the chip cost.

well im not saying i believe his numbers, i just thought I'd point out his argument.
HP Customers now have a new forum http://www.hplies.com where they can post without the OEM HP censoring their posts. HP customers are fed up with HP lying to them and not fixing their computers with the bad Nvidia chip.
http://www.hplies.com is prooving to be a big sucess, and HP is running scared because of it.
Wayne Sallee
Wayne@WayneSallee.com