IBM, Nintendo in $1-Billion Digital Venture

A $1-billion deal announced Wednesday between Nintendo Co. and IBM Corp. will create a powerful computer architecture to be used not only in the Japanese video game maker’s new console but also in a range of digital devices.

Nintendo’s next-generation system, currently known as Dolphin, will use IBM’s PowerPC processors and a DVD-based software system developed by Japanese manufacturing giant Matsushita Electric Industrial Co.

The software, which is not complete, will allow consumers to play games on Nintendo’s Dolphin machine and other devices such as DVD players. Under the agreement, IBM will make a custom 400-megahertz PowerPC microprocessor for Dolphin, scheduled to be released worldwide in late 2000.

Nintendo’s plans, which further blur the line between PCs and consumer electronics, mark the largest melding of these industries so far.

Computer companies such as Microsoft Corp. and Toshiba Corp. have signed deals with game firms--Sega Enterprises and Sony Corp., respectively--to jointly develop new technologies.

The video game industry has transformed itself from a niche business into a global powerhouse, with about $6.3 billion in revenue last year.

The news also marks a fundamental shift in corporate strategy for Nintendo, which has traditionally developed technology with smaller, Asia-based partners, said Howard Lincoln, chairman of Nintendo of America.

Still, Lincoln said, the company will continue on a path that doesn’t necessarily adhere to the widely touted convergence of computing and consumer electronics.

“Nintendo will position the machine as a home video game system and let [Matsushita unit] Panasonic drive the market with DVD products that incorporate Dolphin,” Lincoln said. “That’s what we know how to do. This thing won’t turn on the washing machine.”

That’s in direct contrast to the strategy of No. 1 console maker Sony, which is billing its new PlayStation 2 as a multimedia entertainment system.

Nintendo’s partnership with IBM, which already is building PowerPC chips at a Vermont facility, gives the game company a strategic advantage over Sony, said John E. Kelly III, general manager of IBM Microelectronics.

Sega will be first to release a new console when its Dreamcast machine is available at stores on Sept. 9. But the No. 3 console maker’s new product is widely expected to fall behind more powerful machines from Sony and Nintendo. The reason, say experts, is that Sony and Nintendo have a larger and more loyal consumer base.

“Usually player No. 3 tends to be laggard in the market,” said Seema Williams, an analyst with Boston-based Forrester Research. “It costs too much to develop enough content for three, and consumers have a limited attention span.”

Wednesday’s deal helps not only Nintendo but also IBM, which is looking to broaden the market for its PowerPC products.

Traditionally, these chips have been used to power Apple Computer Inc.’s line of Macintosh desktops. But the business has languished in the last few years, partly because IBM didn’t have the marketing muscle to take on chip leader Intel Corp.