The deal appears to be at the expense of semiconductor giant Intel Corp., whose Pentium III processors run the original Xbox that's been on the market since 2001. Microsoft is expected to release its second-generation Xbox in 2005.
Kevin Krewell, senior editor of InStat/MDR's Microprocessor Report, said Xbox deals aren't necessarily lucrative.
"I don't think Intel is all that serious about the gaming console business," he said. "I wouldn't be surprised if there wasn't a very serious proposal from Intel" on the second-generation chip deal.
An Intel spokeswoman declined to comment.
No details about the new chip were released, and a Microsoft spokesman did not return a telephone call seeking comment.
IBM's new semiconductor plant in East Fishkill, New York, currently makes IBM's own processors, which are typically used in IBM servers and other high-end computers, as well as chips for other companies, including Apple Computer Inc.
Krewell said IBM's plant also could manufacture the new Xbox's graphics chips.
In August, Microsoft selected ATI Technologies Inc. to design — but not make — the upcoming console's graphics system. Nvidia Corp. provided the original Xbox's graphics chip.
"IBM could wind up supplying the entire silicon for the XBox2," Krewell said.