Sony Forks Over Chip Production To Toshiba :can do a better job of supplying the brains for the PlayStation 3.

Sony and Toshiba are collabrating for chip development :

Sony announced on Thursday a plan to sell its loss-making multimedia microprocessor operations to Toshiba for an undisclosed amount, hoping that its trusted joint venture partner can do a better job of supplying the brains for the PlayStation 3.

Following a month of leaks to various media outlets by unnamed sources, the world's second-largest consumer electronics company made an announcement late on Thursday that it will unload production lines for its Cell processor in a joint venture arrangement for a reported amount of about 100 billion yen ($856.38 million) to Toshiba.

The sale, drawn up in preliminary form as a nonbinding memorandum of understanding, is the latest swing of the ax by Sony Chief Executive Howard Stringer, who has cut the workforce and closed factories to boost profitability. In February he promised to cut back on development costs for the expensive, loss-making chips and to consider outsourcing production to outside partners.

Toshiba appears to be the best available buyer: Along with IBM (nyse: IBM - news - people ), Toshiba helped Sony develop the Cell, which bundles multimedia game features onto a single chip using 65-nanometer technology. Cell is produced in a plant in Nagasaki, in southwestern Japan; costly investment would be needed to prepare it to produce chips using next-generation 45-nanometer technology.

In addition to the sale of the Cell line, Toshiba is also taking over the manufacturing equipment for a line of image-processing chips also used in the PlayStation 3. Both sides were mum on how much the sale was worth but Nikkei Business Daily reported before the announcement that the sale price was about 30 billion yen ($256.92 million).

In a joint announcement, the two companies said Sony would transfer to Toshiba its advanced 300-millimeter wafer line fabrication facilities installed in a plant operated by its subsidiary, Sony Semiconductor Kyushu Corp., by the end of March 2008. The facilities house the Nagasaki Technology Center, responsible for developing the Cell line.

While the ownership of the asset would go to Toshiba, Sony and its gaming unit, Sony Computer Entertainment, would jointly participate in the production process as a minority shareholder of 40% in a new joint venture to be set up in April with Toshiba, which would take the remaining 60%.

Sony (nyse: SNE - news - people ) shares swooned after initial press rumors of the sale a month ago, but on Thursday afternoon, they were up 30 yen, or 0.55%, at 5,430 yen ($46.57).

The sale allows Sony to pass on the heavy cost of microprocessor development to Toshiba, Japan's largest microchip maker. It could possibly lower Sony's procurement costs for Cell chips if Toshiba can reap production efficiencies from commercializing the chips in a broader range of applications. Sony will also be able to invest the proceeds of the sale to bolster its world-leading position in image-processing chips for its digital cameras and cell phones.

For Toshiba (other-otc: TOSBF - news - people ), buying the Cell line would give it a huge upgrade in the system chip business, where it is lagging far behind Intel (nasdaq: INTC - news - people ) and Samsung (other-otc: SSNLF - news - people ), with the anchor of having Sony as a reliable buyer.

Both companies said they would jointly advance the Cell chips to the next stage of technology: Toshiba was reported by Nikkei Business Daily as intending to roll out a 45-nanometer version of the Cell in two years and employinh the cutting-edge chips in personal computers and flat-panel televisions.

The market has been concerned about Sony's growth prospects over the longer term beyond its recent obsession with asset sales and cost cutting. The sale of Cell follows after it sold part of Sony Financial last week, bringing the unit public in a 320 billion yen ($2.74 billion) share sale. (See: " Sony Cashes In On Financial Unit")

While it is planning to sink more money into research and development to reclaim technical leadership, exciting new growth areas seem far off, and it will now have to rely on Toshiba, a competitor on the consumer electronics front, for future generations of microprocessors for its games consoles.

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