Analysts expect ATI to announce the new chip, code-named R350, within the next few weeks.
The Canadian graphics chipmaker took the speed lead last year with theof the Radeon 9700, the first graphics chip to take advantage of new programming capabilities built into DirectX 9, the latest version of Microsoft's library of PC graphics instructions.
The R350 will use the same basic design as the 9700 but will be built on the 0.13-micron chipmaking process, said Mercury Research analyst Dean McCarron.
Chipmakers have been struggling with the transition from the 0.15-micron process--which refers to the size of the smallest features that can be printed on the chip--to a 0.13-micron environment. Smaller features allow more transistors to fit on the same piece of silicon, boosting performance and cutting manufacturing costs.
Nvidia decided to make the jump to 0.13 micron with theGeForce FX chip, which resulted in repeated as chip foundries worked out kinks. ATI decided to wait until this year to make the shift, allowing it to essentially squeeze out an extra generation of 0.15-micron chips.
"For both companies, it was a gamble," McCarron said. "If the 0.13-micron manufacturing processes were available when they were supposed to be, the bet would have gone the other way."
McCarron said that while the 0.13-micron shift should boost performance modestly for the new ATI chips, efficiency is more important. "ATI and Nvidia will not only be coming out with faster parts, but--more importantly--less expensive parts," he said.
Judging from the first independently published benchmark reports on graphics cards using Nvidia's GeForce FX--expected to go on sale early next month--it might not take much of a speed boost for ATI to keep up with Nvidia in the performance area. Reports on PC enthusiast sites such as Tom's Hardware and Anandtech found that that the GeForce FX outperformed the Radeon 9700 by only a slight margin in popular 3D games and other common PC applications.
"They're more or less competitive with each other," McCarron said. "I wasn't expecting a huge gap."
But the 9700 has been on the market for several months now, meaning ATI should be able to offer competitive graphics cards well below the $400 price point now considered standard for high-end graphics boards.
Nvidia spokesman Derek Perez said the benchmark tests don't tell the full story, since there are no applications now that take full advantage of the DirectX 9 capabilities GeForce FX was built for. And the Santa Clara, Calif.-based company's products offer benefits besides raw performance, he said, such as regular and unusually stable releases of update driver software.
"The GeForce FX is a quantum leap in technology," he said. "I don't think the numbers paint the whole picture."
To date, ATI's speed lead with the Radeon 9700 has had little effect on the company's market share. The type of PC who buy high-end graphics cards like the Radeon 9700 are a small part of the market, said Peter Glaskowsky, editor in chief of industry newsletter . But gains made there could help ATI as the technology filters down to broader segments of the market.
"There's not really that much money on the bleeding edge--it's prestige and bragging rights," he said. "But the fact ATI was able to establish itself as the clear performance leader for a couple of months--I think it's going to give them a market-share push in the long run. People are going to think of them more seriously where it matters, in the market for $100 to $150 cards."
Merrill Lynch analyst Joe Osha lowered price targets for Nvidia in a report published Wednesday, based partly on expected delays in achieving volume production of the GeForce FX. Nvidia's manufacturing partner Taiwan Semiconductor Manufacturing Corp. (TSMC) said this week that it doesn't expect to have major activity in 0.13-micron chipmaking this quarter.
"What I know is that if it (the GeForce FX) was really going to explode out of the box in the next month or so, you should have massive wafer starts at TSMC, and there are no signs of that happening," Osha said.
But further delays are unlikely to hurt Nvidia or help ATI, he said, noting that holiday sales reports showed minimal gains for ATI, despite its performance edge. "Nvidia is pretty effective at marketing," he said.
McCarron added that performance is just one of the considerations that go into determining market trends in the graphics chip business.
"What makes the difference is the OEM (original equipment manufacturer) market, where your PC makers buy chips in the millions," he said. "There's a bunch of different variables there--their name recognition, their pricing, their stability issues related to things like device drivers. It's a battle on many fronts."
"That said, the competitive environment for Nvidia is certainly much stronger now than it has been for several years," McCarron concluded.