Speculation abounds that AMD is developing the chip that will power Nintendo's upcoming gaming console codenamed Nintendo NX.

The rumor is not without merit, and it is not impossible to imagine Nintendo partnering with AMD, since the chipmaker already supplies the graphics processing unit (GPU) for the Nintendo Wii U. The rumors first began when AMD chief financial officer Devinder Kumar announced in December that the firm was working on two semi-custom chip designs, with one of them being developed for a device "beyond gaming," leading many to assume that the other was a gaming device.

"I will say that one [design] is x86 and [another] is ARM," Kumar said last year. "And at least one will [be] beyond gaming."

And on Friday, AMD CEO Lisa Su announced that the company had won a third contract for a semi-custom chip design that she says will be used in products that could generate billions of dollars in sales. Su, however, declined to say which product will be using its third chip design.

AMD's semi-custom chips are a combination of central processing unit (CPU) and GPU. The company calls these accelerated processing units (APU), and while Intel makes similar CPU and GPU combinations, AMD has a focus on the graphics end of its APUs, making them preferred by the gaming industry.

For AMD to succeed in a new venture with Nintendo, its new APU has to provide the ability to run PowerPC processing to enable backwards compatibility with Nintendo's older games. The current Nintendo Wii U launched in 2012 is powered by IBM's older PowerPC, but a shift to the x86 architecture used by AMD and Intel will more likely provide the power needed to translate the software and make games for the Wii and Wii U compatible with the upcoming Nintendo NX.

Additionally, the game console-dedicated portion of the chip-making industry largely revolves around AMD. Intel is not very intent on creating console processors, instead focusing on chips made for PC and mobile devices, where the margins are higher. IBM's chip business, on the other hand, is so small that it has sold off the majority of it to Globalfoundries, leading many to believe that console makers are not about to put the future of their business in the hands of IBM's aging chips.

AMD's semi-custom chip business is doing well, according to the company's latest earnings report. The last quarter saw sales rise by 13 percent from the previous quarter, although the number is down by 8 percent from the previous year.

"I think it's a very high probability unless Nintendo goes Android where I would expect them to go with NVIDIA," Patrick Moorhead, analyst at Moor Insights & Strategy, tells VentureBeat.

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