Nvidia told to keep supplying Xbox chips

An arbitration panel says Nvidia must keep making graphics chips for Xbox, amid a dispute over pricing and production volumes. The chip has already contributed to a drop in Nvidia's revenues

Graphics chip maker Nvidia has been ordered to continue supplying Microsoft with Xbox chips, the company has revealed.

In a regulatory filing on Tuesday, Nvidia said that an interim ruling by a third-party arbitrator required Nvidia to supply Microsoft's "reasonable requirements" for Xbox chipsets while the case is pending. Nvidia and Microsoft entered into a binding arbitration process in April over how many Xbox chips Nvidia is required to produce, and what price Microsoft should pay.

The arrangement to supply graphics hardware for the Xbox, Microsoft's gaming console, has been in place since the spring of 2000 when Microsoft paid Nvidia an advance of $200m (about £128m) against future orders. The deal has not, however, proved lucrative for Nvidia so far. In July, Nvidia warned that it has been forced to write off a large amount of inventory, including Xbox chips that became obsolete when Microsoft changed security codes for the console to thwart hackers.

Microsoft is currently paying Nvidia in advance for chips it orders, but is asking arbitrators to reduce the chips' prices and to award damages. (Nvidia is also asking for price relief and for damages.) As a result, Nvidia has been forced to set aside part of the income from the Xbox chips, amounting to the difference between what Microsoft is paying and what it says it should be paying. This was about $46.2m as of 28 July, according to Nvidia. The arbitration is not expected to conclude until next June.

If it loses the arbitration, Nvidia has warned in regulatory filings that it could be forced to produce Xbox chips at a loss, and to reduce production of other products to fulfil Xbox demand. The company could also be compelled to licence its intellectual property as part of the settlement, Nvidia said.

"Even if the Company does prevail, there can be no assurance that its business will not be materially harmed," Nvidia stated in the filing.

Microsoft has a motive to reduce component prices, since it is estimated to be losing as much as $150 for each Xbox sold. The company recently introduced a new video processor into the console as a way of reducing prices. Flextronics International, which manufactures the Xbox, is in the process of transferring some Xbox production from Hungary to China as a means of further reducing costs.

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