Gaming's Surprise Winner: IBM

"It doesn't make or break the story at IBM," says Bill Gorman, a vice president who covers technology at PNC Advisors, which holds IBM shares. But IBM's microelectronics swinging back into the black after a tough patch has been an important factor in improving earnings overall, he says.

IBM does not specifically disclose revenue and earnings for its microelectronics division. But the company did say that microelectronics sales grew 14% in the third quarter -- more than four times as high as the 3% growth posted by global services, its largest division. The division's operating margin is higher than that of global services, though lower than the company's overall operating margin.

IBM already has begun receiving sales from the custom processor it designed for Microsoft's Xbox 360, which has sold out at numerous retail stores since last week's North American launch.

And next year IBM will start receiving revenue from the Cell processor specially designed in a joint venture with Sony and Toshiba for Sony's PlayStation 3 console, set for sale in at least one region this spring.

Similarly, IBM's technology will be powering Nintendo's Revolution game console also due out next year.

A Cool Billion

Sanford Bernstein analyst Toni Sacconaghi estimates that IBM will ship 2 million to 3.5 million gaming processors in 2005, translating into $240 million to $400 million in revenue at $120 per chip.

But that forecast may be high, as iSuppli has estimated that the Xbox 360 gaming processor costs $106. And IBM may get even less -- say 50% to 75% of that amount -- for chips it farms out to be manufactured by partner Chartered Semiconductor Manufacturing(CHRT Quote), says Len Jelinek, director and principle analyst covering semiconductor manufacturing for iSuppli.

Still, suppose IBM gets roughly $100 for each Xbox 360 sold, and Microsoft has estimated that it would sell 4.5 million to 5.5 million consoles by June 30. It's not a leap, then, to forecast that Microsoft would sell 10 million Xbox 360 consoles in 2006. That translates into a cool $1 billion in chip sales for IBM, representing 1% in additional sales for the company.