ANAHEIM, Calif. — When Microsoft Corp. announced a mammoth global recall of its Xbox 360 a year ago, the software giant never disclosed the exact source of the game console's heat problem that led to the fiasco.

Now, in an unlikely venue at Design Automation Conference here, Bryan Lewis, research vice president and chief analyst at Gartner, disclosed that the problem started in a graphic chip. Lewis offered this offhand revelation while discussing the changing ASIC and ASSP landscape for his DAC audience.

The Xbox 360 recall a year ago happened because "Microsoft wanted to avoid an ASIC vendor," said Lewis. Microsoft designed the graphic chip on its own, cut a traditional ASIC vendor out of the process and went straight to Taiwan Semiconductor Manufacturing Co. Ltd., he explained.

But in the end, by going cheap--hoping to save tens of millions of dollars in ASIC design costs, Microsoft ended up paying more than $1 billion for its Xbox 360 recall.

To fix the problem, Microsoft went back to an unnamed ASIC vendor based in the United States and redesigned the chip, Lewis added. (Based on a previous report, the ASIC vendor is most likely the former ATI Technologies, now part of AMD.)

Asked the moral of the story, Lewis said: "Had Microsoft left the graphics processor design to an ASIC vendor in the first place, would they have been able to avoid this problem?

"Probably. The ASIC vendor could have been able to design a graphics processor that dissipates much less power."

During Microsoft's conference call with analysts in July 2007, Robbie Bach, head of Microsoft's Entertainment and Devices division, withheld details of the Xbox 360 problem, other than calling it a "design issue." When pressed by an analyst if it was caused by Xbox production or assembly, Microsoft's Bach said at that time, "No."

He added: "Our partners are doing good work." Rather, "the challenge" was created by "Microsoft-initiated design,"Bach said.

Although some system companies have been experimenting with direct links to foundries by cutting out the ASIC design houses, the death of ASICs may have been greatly exaggerated. More accurately, "many ASSP companies are designing ASICs for high volume customers," Gartner's Lewis said. The "ASIC market is far from dead, but it trails the ASSP market," he said.

Lewis cited Nokia, the world's largest handset vendor, which has stopped designing its own ASICs. It recently opened up its IC sourcing to various chip vendors beyond usual suspects such as Texas Instruments and STMicroelectronics.

"System OEMs have no business designing ASICs any longer," said Lewis. The reality is that system companies are finding it hard to do enough ASIC designs to keep in-house design teams employed.

When it was pointed out that Microsoft still has its own semiconductor technology group that is still designing various chips, Lewis responded, "How many ASICs per year does Microsoft design? Not many" compared to experienced ASIC/ASSIP vendors.

Microsoft did not respond to requests to comment on this story.

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Short version:

MS tried to cut (probably) AMD/ATI out of the process, and got burned.