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Microsoft is making chips
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August 23, 2000: 7:41 p.m. ET
Software maker is developing communications circuit for WebTV
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NEW YORK (CNNfn) - Microsoft Corp., the world's largest software maker, is ready to try its hand at the chip business.
In a move that could threaten its close working relationship with Intel, the world's biggest chipmaker, the Redmond, Wash.-based software giant has been pouring money into the development of a semiconductor it plans to use in its upcoming "WebTV" Internet access devices.
The new chips, details of which were first reported in the San Jose Mercury News Wednesday, are code-named Solo2. They have been designed to control the next generation of Internet access devices built by Microsoft's Mountain View, Calif.-based WebTV Networks subsidiary.
Microsoft Corp. (MSFT: Research, Estimates) has spent about $100  million developing the chip, which it expects to roll out this fall, Richard Doherty of the consulting group Envisioneering told CNNfn Wednesday.
The move marks a substantial shift in Microsoft's technology development strategy and its traditional relationship with Intel (INTC: Research, Estimates). For years, the two tech titans have been closely tied, developing their respective products in close cooperation.
Currently, the vast majority of the world's computer systems consist of some version of Microsoft's Windows operating system running on an Intel or Intel-compatible microprocessor, leading to what industry observers have termed the "Wintel" duopoly on the desktop.
Last spring, the two companies extended that alliance when Microsoft picked Intel to develop a chip for its new gaming console, called the X-Box, expected to hit retail shelves during the second half of 2001.
Doherty told CNNfn that Microsoft's move into chips "is firing a shot across Intel's bow, or maybe below the waterline."
But Intel spokesman Chuck Mulloy said that while Intel and Microsoft have a long-standing relationship in areas where they cooperate very closely, in other areas, the companies have gone different paths.
"We expect going forward the relationship will be the same," Mulloy said.
"We're also working with a number of customers to address the Internet television market, including PCC in Hong Kong, InCable in India, and a joint venture with Hughes Electronics for set top boxes," Mulloy added. "In addition, we are developing low-cost video applications based on our StrongARM architecture."
According to the report published in the Mercury News, Microsoft's Solo2 chip will be able to power other next-generation Internet devices and services in addition to the WebTV devices.
Jon DeVaan, senior vice president of Microsoft's TV services and platform division, said the chips will be priced at about $20 and the company plans to sell them and license the technology to others. Initially, the chips for the WebTV devices will be manufactured in Asia by Toshiba, DeVaan said.
 But if Microsoft does intend to sell the new chips to other companies, it will find itself facing some stiff competition. Analysts expect shipments of Internet access devices and other "information appliances" to soon outnumber those of traditional desktop PCs as the Internet becomes a more pervasive force in everyday life.
Earlier this summer, Transmeta, a Silicon Valley start-up chip-design company, landed a contract to design a "Crusoe" processor for the Internet access devices PC maker Gateway is developing in partnership with America Online.
Microsoft shares were ended down 1/2 at 70-3/4 in light Nasdaq trade. Intel, which is hosting a developer's conference in San Jose, Calif., finished 2-1/2 higher at 74-5/8, a 3.5 percent gain on the day. 
-- CNNfn's Steve Young contributed to this report
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