Microsoft pushes Nvidia before it could jump from Xbox 2

Graphics chip underdog ATI Technologies has announced it has signed a contract with Microsoft to produce components for future versions of the Xbox game console, beating out market leader Nvidia.

ATI said it entered a technology agreement with Microsoft to develop "custom, leading-edge graphics technologies" for the console.

Robbie Bach, senior vice president of Microsoft's home and entertainment division, said in a statement: "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."

The announcement ends months of speculation over whether Nvidia, the leading maker of graphics processors for PCs, would renew its troubled partnership with Microsoft on the Xbox. The graphics processor is the most expensive component in the Xbox, and Nvidia stood poised for a major windfall after the chipmaker won the contract shortly after the Xbox was announced three years ago.

But sales problems and hardware changes left Nvidia with piles of unsold and unusable chips, putting it in a position where it could have lost money on the console if it hadn't submitted the Microsoft contract to arbitration.

The Xbox deal has accounted for 15 per cent to 20 per cent of Nvidia's sales over the past two years, and company executives credited Xbox-related business for a surge in profit during Nvidia's most recent quarter.

David Becker writes for CNET News.com