Infineon contributes to Microsoft Xbox 360

Georgina Prodhan

FRANKFURT: Infineon will supply parts for Microsoft's Xbox 360 games console, securing an important foothold in the fast-growing video-games market and underscoring a new focus on higher-margin products.

Although analysts estimate the deal will bring in a modest 100 million to 150 million euros ($123 to $185 million) annually for Infineon -- around 2 percent of total sales -- the news cheered investors keen to see a move away from low-margin DRAM chips.

The deal is a breakthrough for Infineon, Europe's biggest chipmaker, after memory-chip industry leader Samsung was sole supplier for Microsoft's current Xbox version.

Infineon did not give financial details of the deal, under which it will supply key accessory components for the Xbox 360. Microsoft has yet to say who will supply the consoles' core DRAM memory chips -- for which Infineon could also be in the running.

"Now that Infineon is in there it could participate in a boom in the market for consoles," said Daniel Kerbach, a fund manager at Activest, which holds Infineon shares. "Of course it would be nice to see more such deals in the future."

The total video-games hardware and software market is estimated to be worth $25 billion annually, and is expected to be boosted by the launch of a new generation of consoles from Microsoft, Sony and Nintendo over the next year.

"Microsoft is an extremely attractive partner," Infineon board member Peter Bauer told CNBC television. "It creates a lot of hardware revenue in the future. Gaming consoles are growing really fast and contain a lot of semiconductors."

Infineon will provide a wireless game-pad controller, a removable memory unit for storing game scores and an advanced security chip for the Xbox 360s, which are expected to go on sale in November in time for the Christmas shopping season.

Drop in the ocean

"It's good for validation of the company although in terms of dollar revenues we don't think it's going to be that massive," said JP Morgan analyst Uche Orji.

Infineon Chief Executive Wolfgang Ziebart has said since he took over late last year that he would focus more on profitability and less on gaining market share in DRAM memory chips, which bring in around 40 percent of Infineon's sales.

However, JP Morgan cut its price target for Infineon to 7.50 euros from 8 euros, saying weaker prices for DRAM chips were still a more important factor than the Microsoft deal.

Orji estimated Infineon's revenues for the accessory chips would be in the low single-digit dollars per console, or up to 120 million euros annually. Microsoft has not given unit sales targets for the Xbox 360.

"In terms of their strategy of concentrating on higher-margin products, it's a sign that that's bearing some fruit, but on its own it's a drop in the ocean," he said.

The expected November launch of the Xbox 360 will give Microsoft a headstart in its battle with Sony's PlayStation3 and Nintendo's next-generation Revolution console, both due in 2006.