Microsoft, ATI sign graphics deal for future XBoxes

ATI Technologies Inc. has secured a "future technology agreement" for upcoming versions of Microsoft Corp.'s XBox, taking over the business formerly held by rival graphics vendor Nvidia Corp., ATI announced Thursday.

ATI will license graphics technology to Microsoft for the next version of the XBox, said Chris Evenden, an ATI spokesman. Microsoft will attempt to surpass gaming console leader Sony Computer Entertainment Inc.'s Playstation 2 with the next generation of the XBox. The XBox has overtaken longtime gaming company Nintendo Co. Ltd.'s GameCube, but trails Sony among console gamers.

Financial terms of the deal were not disclosed, Evenden said.

Nvidia had recently signaled that it wouldn't be interested in pursuing the next-generation XBox business, said Jon Peddie, principal analyst for Jon Peddie Research in Tiburon, California. The company recently said it was looking to cut costs, and a number of industry observers have indicated that Microsoft was looking for another partner, Peddie said.

Microsoft and Nvidia have sparred over pricing issues since their initial agreement was signed in 2000. The companies brought in an arbitrator in 2002 to hear a dispute over the price Microsoft pays for Nvidia's chips. But they agreed to settle their differences in February, and talked of a future partnership to reduce XBox costs.

At one point in 2002, Nvidia was also left with a sizable amount of unusable inventory after Microsoft changed the security settings for the XBox, forcing Nvidia to absorb that cost. ATI will not carry inventory for Microsoft, Evenden said.

Sony and Nintendo have both designed their own graphics controllers for their consoles using intellectual property from other companies, Peddie said. In fact, Nintendo uses ATI's technology in the GameCube, an arrangement Microsoft was aware of as it evaluated ATI's technology, Evenden said.

Those companies have greatly lowered the cost of their graphics engine with the strategy, but the approach can be tricky, Peddie said.

"By going for an intellectual property deal, Microsoft now has to get involved with the fabs and integrated circuit design. Although the company has had experience doing things like that with its WebTV box and its set-top box, they may or may not have a team in place ready to go quickly. Building and testing high-performance integrated circuits at 0.13-microns or better is really tricky stuff," he said.

Microsoft would cut their overall costs, but would "take on quite a burden of technology management," Peddie said.

Nvidia will continue to supply XBox graphics chips for the current generation of the console, the Microsoft spokeswoman said. An Nvidia spokesman did not immediately return calls seeking comment.

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