NVidia ordered to supply Xbox chips

Graphics-chip maker NVidia Corp. has been ordered by an arbitration panel to continue supplying Microsoft Corp. with chips for its Xbox video game console, the Santa Clara, California, company said in a filing with the U.S. Securities and Exchange Commission (SEC) on Tuesday.

In March 2000, NVidia agreed to supply certain graphics and processing chips for Microsoft's game console but the companies are in dispute over the price the Redmond, Washington, software giant pays for the NVidia chips and the quantities in which they are produced.

"The arbitration panel has issued an interim ruling that the Company must supply Microsoft's reasonable requirements of chipsets, but no minimum or maximum amount has been set overall or for any particular period," NVidia said in its filing with the SEC.

NVidia did not say when the ruling was issued. Company representatives could not immediately be reached for comment.

Microsoft, which requested arbitration in April, has also asked for damages for what it considers to be violations of the agreement and requested that the arbitration panel reduce chipset prices it pays, while NVidia has asked for "pricing relief" over the chipsets along with claims for damages, NVidia said.

NVidia said in the filing that it has been recording, as deferred revenue, the difference between what Microsoft is actually paying and the lesser amount that Microsoft claims it should be paying. The deferred amount was US$46.2 million as of July 28, the NVidia filing said. The company plans to continue deferring revenue related to the disputed pricing and volume discount for future sales of the processors until the matter is resolved.

The agreement between NVidia and Microsoft has been wrought with problems. In its second quarter financial statement, NVidia asserted that graphics chips designed for the Xbox video game went unused after Microsoft altered some security aspects of the Xbox, making earlier NVidia chips obsolete in the process. As a result, NVidia was left with a chunk of unsold inventory, the company said. In February, NVidia officials revealed that the SEC has begun an investigation into how NVidia recorded costs associated with its development of graphics chips for the Xbox, specifically, how it recorded reserves during the fourth quarter of its 2000 fiscal year and the first quarter of fiscal 2001. The Microsoft-NVidia arbitration is being conducted in New York by a panel under the rules of the American Arbitration Association and is expected to be concluded by June 30, 2003, NVidia said in the filing.