How might DeepSeek affect Nvidia's market power

The US-based technology company Nvidia has probably benefited as much as any other company from the growth in artificial intelligence. The company is based in Santa Clara, California and was started in 1993 by Jensen Huang (CEO), Chris Malachowsky, and Curtis Priem.

Nvidia is a software business that designs and supplies graphics processing units (GPUs). GPUs are crucial for artificial intelligence (AI) because they can process huge quantities of data in parallel, significantly accelerating machine learning and deep learning tasks.   

Nvidia’s chips were originally used for computer games, but they have now found much wider applications in cryptocurrency mining, self-driving cars, and, importantly, training AI models. These are machine-learning algorithms that are crucial for the development of AI.   

Nvidia has an effective monopoly in the GPU industry because its market share is around 90%. To underline the market power Nvidia enjoys and the benefit it has received from the growth in AI, you have to look at its last quarter’s revenue of $35 billion (up 96% from the previous year) and profits of $19 billion (up 108% from the previous year). Nvidia’s market capitalisation is $2.94 trillion (total value of Nvidia’s shares). After Microsoft and Apple, Nvidia is now the US’s third-most valuable business. 

On January 27 2025, a new Chinese entrant came into the AI market with a product called DeepSeek. The company is based in  Hangzhou, Zhejiang and is owned and funded by  Liang Wenfeng, a prominent hedge fund investor. DeepSeek formed the business in 2023, and Liang Wenfeng claims DeepSeek costs less than $6m to train, a fraction of the $63m it costs to train Open AI's ChatGPT 4.  This means DeepSeek is a much cheaper alternative AI model than the existing firms in the market. This is important to Nvidia because ChatGPT uses hardware (GPUs) developed by Nvidia to train and run its AI models. If more people use DeepSeek instead of ChatGBT, Nvidia will see its monopoly power weakened, and its revenues and profits fall.  

DeepSeek's challenge to Nvidia was highlighted by the company's share price decrease last week, along with general turbulence in US technology shares. It will be interesting to see the long-term implications of DeekSeek for the AI market.

Some discussion points

1. To what extent is Nvidia a monopoly?

2. What type of barriers to entry might exist in the AI market?

3. What type of profit might you expect Nvidia to benefit from?

4. To what extent is the entry of DeepSeek into the AI market good for consumers?