“We’re combining Microsoft’s vision, software experience and R&D resources with ATI's pioneering leadership in graphics technologies to create innovative future Xbox products and services that meet the lifestyle needs of consumers in the Digital Decade,” said Robbie Bach, senior vice president of the Home and Entertainment Division at Microsoft. “We selected ATI after reviewing the top graphics technologies in development and determining that ATI's technical vision fits perfectly with the future direction of Xbox.”
“Microsoft shares our passion for cutting-edge innovation,” said K. Y. Ho, chairman and chief executive officer, ATI Technologies Inc. “Our success working with Microsoft in the past gives us great confidence as we move forward, and our broad experience and wealth of engineering resources will ensure that we deliver. This agreement cements ATI’s position as the prime graphics supplier for the future of the games industry.”
Most likely the Xbox2 will be powered by an Intel CPU. The previous Xbox was powered with a Pentium 3, and because ATI has a license from Intel for the 800MHz FSB Pentium 4 we will probably see a Pentium (maybe Prescott, Tejas or even Nehalem) in the Xbox2. But the release of the Xbox2 is still far away in 2006, so it is still early to speculate about which CPU will be in the Xbox2.
There are also rumours that ATI is working together with Nintendo for a graphic solution for Nintendo his next gen Gamecube, but I have no idea if this deal with Microsoft will be bad or not for the deal with Nintendo.
Oh and by the way, the reason why Microsoft is not working together with nVidia is not because they at the moment are running performance/price-wise a little behind ATI. Nvidia stated clear some time ago that it was not interested anymore in working with Microsoft, because of pricing issues with the current Xbox and other problems with Microsoft.