Will Nvidia, Microsoft Split On Xbox 2?

One of the more interesting takeaways from Nvidia's upbeat analyst meeting yesterday is the possibility that the company will not pursue a "design win" for the second generation of Microsoft's Xbox videogame console.

Nvidia makes specialized graphics chips for Microsoft's Xbox, which hit the market in the fall of 2001. It was a high-profile customer win for Nvidia, whose main business is general-purpose graphics chips for PCs, but it has not been without problems.

Last spring, Nvidia and Microsoft got tangled in pricing arbitration when Microsoft, in an effort to cut costs on the moneylosing Xbox, wanted to pay less for the chips. In February, an arbitration panel sided with Nvidia, which had locked up pricing when the companies signed their original deal.

Analysts estimate that Nvidia's gross margins are about 25% on Xbox chips, compared with 30% to 35% for overall company margins.

There has been spotty demand for Xbox as Microsoft struggles to get game developers to write programs exclusively for its console. One of the most highly anticipated Xbox games--Halo 2, developed by Microsoft's game division--will miss the crucial holiday selling season. That may crimp sales of Xbox and, subsequently, Nvidia's chips, because sales of game consoles are driven by availability of games.

"Add these things up and it's a bad business for Nvidia," says Michael McConnell, analyst of Pacific Crest Securities, who believes that Nvidia should not and will not pursue a deal to make chips for Xbox 2, due in 2005 or 2006.

News source: Forbes - Will Nvidia, Microsoft Split On Xbox 2?

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