(FORTUNE Magazine) – The best roadmap to IBM's hardware future is the amazing thumbnail-sized processor known as the Cell chip--the heart, soul, and brain of the new Sony PlayStation 3 game box. Of course, since this is the new Big Blue, IBM didn't design the Cell by itself. The idea came from Ken Kutaragi, who heads Sony's electronic-games business. When he approached IBM in 2000, Kutaragi was looking for a supercomputer on a chip that would let gamers experience a world like the Matrix movies. "Kutaragi wanted to go 1,000 times more realistic than the PlayStation 2," says project leader Jim Kahle, who ran a team of engineers from IBM, Sony, and Toshiba at IBM's lab in Austin. After the team blew through about $400 million, Kutaragi got much of what he wanted: The Cell is about 60 times faster for graphics than the chip in the PS/2 and runs at 192 gigaflops, or 192 billion floating-point operations per second--five Cells together roughly equal the speed of the world's fastest supercomputer circa 1999. That's partly because it crams nine processors onto a single chip. One is a version of IBM's standard Power processor, closely related to what goes into an Apple Macintosh. But the others are specially designed to process images at lightning speed. For graphics, no other chip in the world can touch it.

Think that's just kid's stuff? Microsoft doesn't. Like Sony, it chose IBM to build its next-generation gaming chips. So did Nintendo. That's the entire industry. Thanks to gaming, IBM's chip group has had three profitable quarters in a row after years of losing so much money that Wall Street urged the company to sell it. More important for IBM, the deep dive into gaming triggered an epiphany: Features that characterize online gaming today--collaboration among many players; detailed, fast-changing visuals--are becoming central for all computing. That trend could boost the Cell into a league with legendary innovations like the IBM PC and the System 360 mainframe, computers that defined entire eras.

The technologies in the Cell will serve as building blocks for IBM's next family of computers, which the company will start rolling out around 2008. The goal is for all the company's non-Intel computers--everything from game boxes and PDAs to supercomputers--to be built of one set of modular components and run the same software. IBM has concluded that the better it does at gaming, the healthier will be its bottom line. Says IBM hardware chief Bill Zeitler: "We are about to enter the next golden age of technology. Games are what you see at the front of the stage. Behind is where the real money is going to be spent."

If you don't play computer games, you probably don't realize how sophisticated the $7-billion-a-year industry and its products have become. The state of the art is online play in rich graphic environments against thousands of other users. Each player sees the game from his or her own perspective, so when your friend incinerates a dragon you can watch from a nearby hill. An estimated 200 million people worldwide play online. Gaming is pushing the limits of real-time graphics and leading to sophisticated, highly immersive user interfaces (which means the game plops you into a simulated world), new forms of multi-user collaboration, and other innovations with crucial nongame applications.

Sony expects to start selling the Cell-powered PlayStation 3 in mid-2006. And that Matrix-like future? It's definitely getting closer, says Bijan Davari. He heads the massive development project for IBM's next-generation computers, known internally as Quasar. He says the machines he's developing will enable someone, for example, to enter and move freely around a completely convincing, photorealistic virtual version of New York City, Tokyo, or anywhere else.

Cool, but why should you care? Because in five to ten years even routine business computing will be less word- and number-based and much more visual, sometimes even giving you the feeling that you are actually inside the data. IBMers see games as pointing the way. Says Irving Wladawsky-Berger, vice president for technology strategy and innovation: "The last paradigm of how people interact with computers was the graphical-user interface of Windows. The next paradigm is emerging in the gaming world, and it's highly visual, incredibly interactive, and incredibly collaborative." Adds David Turek, who runs IBM's fast-growing supercomputer group: "The gaming industry is driven to digitize the real world to improve the gamer's experience. But experiential realism is useful in other fields as well. With 3-D holographic technology, for example, you can build a model of a new car that is infinitely capable of being manipulated and tested."

In the future that IBM envisions, all of us are going to need new ways to perform transactions and get things done using images. Already insurance companies are telling IBM that they face big challenges organizing data such as policy records that include digital images of property, medical scans, and the like.

And in the future, we'll still want to have fun. So the Cell's entertainment applications are endless. View a televised sports event from any seat you choose, follow the movements of a single player, or watch the game from his perspective. Both Sony and Toshiba are planning to build TVs using the Cell.

The first outside customer to buy the Cell, in June, was Mercury Computer of Chelmsford, Mass., which builds systems to display complex visual data. A product area Mercury executives believe they can improve with the Cell is military defense systems. Says CEO Jay Bertelli: "We take data from a sensor and create an image so a human being can assess what's happening. It requires real-time processing. Otherwise, if you've got a missile coming at you, you may be a dead man."

IBM isn't the only tech company looking at games as a roadmap. "Gaming is the future!" says Charles Fitzgerald, director of platform strategy at Microsoft. At PARC, the legendary Palo Alto laboratory owned by Xerox, researchers are studying the behavior of young people who play games together online--perhaps working together to attack that dragon--to better understand what it will mean for the workplace. Says Bob Moore, a PARC sociologist: "I can see those skills being very easily transferable to the business world." After all, it's full of dragons.

FEEDBACK dkirkpatrick@fortunemail.com