NVIDIA Corporation Talks Founders Edition Economics

Image credit: NVIDIA.

When graphics specialist NVIDIA (NASDAQ: NVDA) announced the GeForce GTX 1070 and GeForce GTX 1080 graphics processors back in May, the company listed two sets of prices for these products. The first were manufacturer's suggested retail prices, or MSRPs. The second set were for "Founders Edition" models.

The Founders Edition cards were essentially what were known as NVIDIA's reference designs in the past. Historically, these cards were built by NVIDIA in limited quantities, and sold through NVIDIA's add-in-board partners until those partners rolled out their own card designs using NVIDIA's chips.

With the GTX 1070/1080, NVIDIA made clear that it intends to make these Founders Edition cards available for purchase directly from NVIDIA's GeForce.com website for as long as those graphics processors are relevant in the marketplace. NVIDIA referred to the Founders Edition of the GTX 1060 as a "special limited" edition, so I don't think that one will be around for too long.

On the company's most-recent earnings call, company CEO Jen-Hsun Huang talked a bit more about these Founders Edition cards, and in particular, their economics relative to non-Founders Edition cards.

How are the margins on those Founders Edition cards?

The distribution model for the Founders Edition cards is a bit different than the non-Founders Edition or "partner cards," as NVIDIA refers to them. With the Founders Edition products, NVIDIA basically builds the entire product, and distributes it through its website, as well as through Best Buy (NYSE: BBY). (I'm not aware of any other retailer, online or not, that sells the NVIDIA-branded Founders Edition cards.)

With the partner cards, NVIDIA sells the graphics processor to the add-in-board vendor. In many cases, the add-in-board vendor is responsible for designing the board upon which the graphics processor and other critical components are mounted. The add-in-board vendor also typically uses a customized cooling solution -- the better the cooler, the more a vendor can typically charge for the card.

At first glance, it might seem as though NVIDIA might see better margins on Founders Edition cards relative to the typical add-in-board card because it has more dollar content on these products. However, according to CEO Jen-Hsun Huang on the company's August earnings call, the margin to NVIDIA from sales of Founders Edition cards and from sales of partner cards are "the same."

What's the true purpose of the Founders Edition cards?

On the call, Huang gave an interesting explanation for why the company is even bothering with selling these Founders Edition cards."There are some people that -- some gamers and customers -- who would prefer to have a direct relationship with our company," Huang began.He then went on to note that these cards are produced in limited quantities."The reason for that is because we have a network of partners who are much, much more able to take the NVIDIA architecture to every corner of the world, literally overnight," Huang continued.

He further explained that these add-in-board partners can build many permutations of cards based on the same fundamental NVIDIA graphics processor by varying size, shape, styles, thermal solutions, and ultimately, price. For example, on Newegg.com, there are GeForce GTX 1080 cards listed that range from $629 all the way to $810.These cards are all based on the same graphics processor, but are differentiated in other ways.

At any rate, even if the majority of NVIDIA's graphics processor sales will ultimately be via add-in-board partners, it's not a bad idea to try to build a "direct relationship" with customers. After all, it's in the company's best interests to build up the value of its brand, and being able to sell cards built and sold by NVIDIA seems like an interesting way to do that.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.