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Gaming's Surprise Winner: IBM

If you were to bet on a single winner in the next video game-console cycle, forget Microsoft (MSFT - Get Report), Sony and Nintendo. Put your chips where those console makers did -- on IBM (IBM - Get Report).

All three companies chose IBM to help design and manufacture the gaming chips that are powering their next-generation video-game consoles, a first for the video-game industry that puts Big Blue in a powerful position.

"It's an incredible opportunity for IBM, because whoever wins this market ... IBM is involved," says Chris Crotty, a senior analyst who covers consumer electronics for electronics market research firm iSuppli. "It gives them a very strong starting presence in consumer electronics."

That position in consumer electronics marks an important shift for IBM, which is best known for its tech prowess in the business market.

"If you think about where all the innovation is in technology these days, it's really around the consumer experience," says Pacific Crest analyst Richard Petersen. "So IBM is positioning themselves pretty well to benefit from that growth trend."

By contrast, "innovation in the enterprise has slowed down a lot," Petersen adds. "We're much less excited about the opportunity there," said the analyst, who has a sector perform rating on IBM and whose firm hasn't done any investment banking with the company.

And if any of the video-game consoles eventually evolves into a device that controls all home entertainment -- as envisioned by the console makers -- then IBM also stands to benefit, Crotty points out.

IBM and analysts cite everything from the company's Power PC chip technology and design expertise to flexibility and cost as factors that helped IBM win the chip business in all three consoles, beating out such formidable rivals as Intel (INTC - Get Report).

However, because IBM is such a behemoth, with projected annual sales of $92 billion, its video-game chip business doesn't have a huge impact on the company's financials. It's part of the company's microelectronics division, whose sales are estimated to account for less than 5% of IBM's total sales.
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