Xbox Next to have ATI GPU’s

Well, that explains the $US18 million listed as a “deferred revenue associated with an unannounced contract” that showed up on ATI’s books last quarter. This apparently was a prepayment for R&D associated with developing the graphics chips for the next-gen Xbox. The deal was announced Thursday (Aug. 14th) and wraps up a year of negotiation. It seems that ATI has learned from NVIDIA’s bitter experience dealing with an 800 pound gorilla (read about that here). ATI’s agreement is royalty based, where ATI gets a slice of every Xbox2 sold, as opposed to NVIDIA’s deal as a subcontractor to Microsoft. Microsoft will also subsidize ATI’s research costs. This seemed NVIDIA’s deal to lose, and even with the happy happy sound bites from Microsoft’s Robbie Bach – “We selected ATI after reviewing the top graphics technologies in development and determining that ATI’s technical vision fits perfectly with the future direction of Xbox”, NVIDIA apparently wasn’t willing to be too flexible to make a deal with Microsoft – even though it accounted for up to 20% of NVIDIA’s sales over the last two years. Guess they really didn’t like having to do that arbitration thing. ATI should still be wary, NVIDIA also got an advance – $US200 million – and put 200+ engineers on the Xbox team (and then missed the initial deadline).

“After the way the first Xbox went, I would view NVIDIA’s involvement with the next Xbox as a negative,” said Joe Osha, a senior analyst at Merrill Lynch. Osha also stated that ATI could get $US35 million in Xbox revenues in 2005. Osha expects ATI will reap $25 million to $35 million in royalty revenues (about 5 to 8 cents additional earnings per share) in 2005, assuming a Christmas 2005 roll out for the Xbox2.

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