ATI announced today that it has signed a deal with Microsoft to provide the graphics system for the Xbox's successor. ATI said it will "develop custom, leading-edge graphics technologies for use in future Xbox products and services". That statement left some room for speculation as to whether the deal specifically means graphics chip
production, but most analysts believe that's the case.
Graphics chips for the Xbox are currently provided by Nvidia, but the relationship between Microsoft and Nvidia cooled last year when they entered into arbitration
to settle a dispute over the price Microsoft was paying for Nvidia's chips.
In late-morning trading on Nasdaq, shares of ATI are up 7 percent. Nvidia's stock is down 58 cents, to $16.20.