Last week, Mercedes-Benz and Nvidia announced a partnership to build a software-defined autonomous driving platform for the entire Mercedes fleet starting 2024, letting customers purchase and add capabilities to the car through software updates.

This is not Nvidia’s first collaboration with auto OEMs. According to the company, it is working with over 370 auto OEMs, tier-1 suppliers, and researchers including some of the largest auto companies in the world. But this latest collaboration is significant for Nvidia for one unique reason: the revenue generated from software updates will be split 50/50 between Nvidia and Mercedes according to analysts who had chances of talking to the management after the announcement.

Adding capabilities like fully autonomous driving through software updates is not Nvidia’s creation. Tesla has been doing this for a while with the full-self-driving package which costs $7000, and Elon Musk has made it clear the price will keep increasing as the software gets closer to full self-driving. Nvidia’s CEO Jensen Huang confirmed that Tesla has validated this business model and now Nvidia is bringing that same experience to Mercedes in the announcement.

Semiconductor companies mostly play the suppliers' role, whether in the smartphone, PC, server, or industrial and auto market. They simply sell chips, collect revenue, and move on to develop something new. We have never seen a semiconductor company able to keep collecting recurring revenue through the entire life of a product. Even as dominant as Intel in the PC/server market, the revenue is driven by the shipments, not the installed base. By agreeing to split the revenue, Mercedes is giving Nvidia the strongest validation that we can think of.

Of course, this is still early in the game, and it will only start generating revenue for Nvidia in a couple of years. Nvidia is clearly positioning itself not as a semiconductor supplier in the auto market, but an autonomous driving platform provider. If this collaboration goes well, what’s stopping it from working with other auto OEMs in a similar way?