SAN JOSE, Calif. ATI Technologies Inc. could see royalty revenues of up to $35 million in 2005 based on winning a deal to design the graphics chip for the next-generation Microsoft Xbox.
ATI (Markham, Ontario) announced the deal Thursday (Aug. 14), which has been in negotiations for more than a year. The company will design a semicustom graphics chip, primarily in its Marlborough, Mass., design center for the video game console and charge Microsoft for upfront engineering and per-unit royalties, said Rick Bergman, vice president of marketing for ATI.
For ATI's archrival, Nvidia Corp. (Santa Clara, Calif.) which supplies graphics chips for the current Xbox on a product basis, the deal represents a loss of up to $350 million in 2005, according to one senior financial analyst. In one recent quarterly report, Nvidia said the Xbox represented nearly 20 percent of its sales.
Bergman would not comment on the graphics technology for the next-generation Xbox. However, the company's Marlborough office is known to be working on ATI's so-called R500 core, the successor to the R400 core now being designed in ATI's Santa Clara office and planned for launch in high-end desktop graphics chips this fall. The R500 is expected to be aimed at the DirectX 10 application programming interface to be used in Longhorn, the next major version of Windows expected to be released in 2005.
Bergman did say ATI and Microsoft technical managers quickly agreed on a graphics specification for the system which has been called Xbox2 or Xbox Next and that it will require some custom graphics design work.
Joe Osha, a senior analyst with Merrill Lynch, expects ATI will reap $25 million to $35 million in royalty revenues or about 5 to 8 cents additional earnings per share in 2005 on the deal, assuming a Christmas 2005 roll out for the Xbox2. By contrast, Nvidia will lose $250 to $350 of product revenue or about 8 to 12 cents in earnings per share in 2005, he estimated.
Osha did not change his neutral ratings on both companies as a result of the ATI deal. Nvidia's stock price is already below $20 while ATI faces a challenge in its core notebook graphics market from Intel which is about to roll out an integrated graphics chip set for notebooks.
"We've never seen a graphics or chip set company come through an Intel product ramp unscathed. When Intel ramped its desktop integrated GPU in 2002, Intel's share of the total desktop graphics market went from 13 percent to 32 percent over four quarters," Osha wrote in a research paper Thursday (Aug. 14).