NVIDIA Corporation’s (NASDAQ: NVDA) launch of Tegra 4, considered the fastest processor with 4G LTE, was highly anticipated during the CES 2013. But everyone was surprised when the company’s chief executive, Jen Hsun Huang, unveiled a handheld gaming hardware.

Nobody had expected that a manufacturer of graphic chips and microprocessors was going to release a handheld Android-based gaming system.

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Santa Clara, California-based NVIDIA Corporation (NASDAQ: NVDA) entered the chip business in 1993, and eventually made its way into set-top gaming consoles when Microsoft Corporation (NASDAQ: MSFT) launched Xbox in 2001. Its GeForce processors are leading the PC gaming landscape. The Tegra series of microprocessors are found in smartphones and tablets by Samsung Electronics Co., Ltd. (LON:BC94) (KRX: 005930) and Motorola Mobility Holdings Inc (NYSE: MMI). So the question many analysts are now is is what compelled NVIDIA to enter the gaming hardware market?

Why Nvidia Entered Gaming Hardware Business?

Two things inspired NVIDIA Corporation (NASDAQ: NVDA). One, there are hundreds of games for smartphones and other devices running on Android OS. Unfortunately, those devices lack control buttons that gamers consider necessary for fast action.

Two, the market is now flooded with complex gaming softwares for PCs running on Microsoft Corporation (NASDAQ: MSFT) Windows. To play these games, users have to sit near the PCs or heavy, beefed-up laptops. The company thought users can enjoy the game from the comfort of their bed or couch, if it could stream the actions of the device using a variant of Wi-Fi technology.

In recent years, the company has lost ground to rival Advanced Micro Devices, Inc. (NYSE: AMD) in the set-top market. Microsoft Xbox 360 uses AMD graphics processor. Nintendo Co., Ltd (TYO: 7974)’s consoles use AMD/ATI parts. The design contract for Sony Corporation (NYSE: SNE)’s new PlayStation has been awarded to Advanced Micro Devices. Some other smartphone and tablet makers like Apple Inc. (NASDAQ: AAPL) have chosen to design their own chips. The mobile device processor market is also getting fierce. QUALCOMM, Inc. (NASDAQ: QCOM) is already in a strong position, while Intel Corporation (NASDAQ: INTC) is taking every step to gain the market share.

In such a scenario, what’s better than having end-to-end control of the process – and gaining a bigger slice of the revenue pie? Jen Hsun Huang’s announcement of “Project Shield” is like a toe in the water.

It appears that the company aims to see how well it can design and market a consumer-ready product. Along the way, it can capitalize on its long relationship with game developers to better position itself in the market.

What Is Project Shield?

Project Shield is a handheld gaming device with its own gaming software. It can wirelessly stream games on powerful home computers or high definition TVs using a variant of Wi-Fi technology (802.11n 2×2 MIMO). The device has a dedicated 5-inch display and runs on Android Jellybean. It has 720p “retinal” multi-touch screen and the latest Tegra 4 processors. NVIDIA claims the device has stunning high-definition audio and video. The company is likely to start shipping the device during the second half of 2013.

Challenges For Project Shield

First off, NVIDIA Corporation (NASDAQ:NVDA) itself is not a game designer, so it is still unclear what kind of user experience the company intends. The device has all the core gaming trademarks – media pause/play buttons, four face buttons, dual analog thumbsticks and stereo speakers. But the next thing coming from Sony and Microsoft is expected be a notch above.

The biggest challenge for the company is wireless streaming. Will the streamed games played on PC or TV be as responsive as when they are played on a PC? Gaming enthusiasts will be very concerned about this.

Gaming addicts are highly sensitive to any delays, especially in shooting games where even a slight delay gives the opponent the upper hand.

Another problem is the size of the device. Project Shield is thick and bulky, similar to the original Xbox controller before the redesign. You just can’t carry it in your pocket like a smartphone or iPod. You’ll need to put it in a carrying case or handbag. Based on size, it’s entirely in a different category, making the device less convenient to carry around.

NVIDIA will be competing with the established gaming hardware makers like Nintendo Co., Ltd. (TYO: 7974) and Sony Corporation (NYSE: SNE). Some of the mobile and gaming companies are also NVIDIA’s potential customers for microprocessors. NVIDIA risks angering them by competing with them in gaming hardware business.

Why Project Shield Is A Success Recipe For NVIDIA

NVIDIA will strive hard to make the product a hit among gamers. If that happens, great! But even if the company fails to sell lots of handhelds, the company would have started the legitimization of Android gaming, and will attract the interest of developers and gamers alike. This new perception will benefit NVIDIA in the long-run, even if the Project Shield receives a lukewarm response.

Today, when geeks and analysts argue that tablets and smartphones are disrupting the handheld gaming industry, they are talking about iPads and iPhones. Since Apple Inc. (NASDAQ: AAPL) designs its chips in-house, NVIDIA doesn’t benefit from Apple. In recent years, the market share of Android-based tablets has grown rapidly, thanks to Amazon Kindle Fire, which doesn’t use NVIDIA microprocessors either. So, its a good attempt by NVIDIA to turn the plain old Android into a gaming powerhouse. Thus, more sales of devices with NVIDIA chips inside.

There is also a rumor that Android is soon coming to PCs. Good luck NVIDIA.

Some analysts expect that the recent dip in NVIDIA Corporation’s (NASDAQ: NVDA) share price is only short-term. Investor concerns are mainly the perception that the introduction of hardware may not result in incremental game sales. But NVIDIA’s plans are much more complex. The game has just begun.