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MS Xbox Chip Deal With IBM Thwarts Intel

Monday November 3, 5:18 pm ET
By Mark Boslet, Of Dow Jones Newswires


PALO ALTO, Calif.(Dow Jones)--MS Corp. (NasdaqNM:MSFT - News) delivered a blow to Intel Corp. (NasdaqNM:INTC - News) Monday by selecting International Business Machines Corp. (NYSE:IBM - News) to supply the processor for its next generation Xbox game machine.

Analysts said the technology agreement signed by the two companies puts IBM's Power chip inside the second version of the popular machine, which is expected to be on the market during 2005. Intel's Pentium III chip powers the present Xbox console.

"Symbolically, it's a staggering loss for Intel," said Fred Zieber, an analyst at Pathfinder Research. Intel had muscled out competitor Advanced Micro Devices Inc. (NYSE:AMD - News) to win the first Xbox contract, only to be pushed aside itself this time around.

An Intel spokesman declined comment. IBM contact Scott Sykes also declined to discuss the deal other than to refer to an announcement of the agreement released Monday.

But analysts said MS and IBM will jointly develop a chip for the product based on IBM's Power4 or planned Power5 processor. Both the Power4 and Power5 have models that make use of dual cores, where two computing engines are installed on a single chip. A single-core version of the Power4 runs inside computers from Apple Computer Inc. (NasdaqNM:AAPL - News) .

IBM is expected to manufacture the chip after it is designed.

A MS spokesman declined to comment.

The new Xbox is MS's next weapon its in battle with game machine leader Sony Corp. (NYSE:SNE - News) . For that reason, the chip contract is a high-profile deal.

IBM is presently working on chip designs with Sony and supplies chips to game machine producer Nintendo Co. .