For a long time, Intel counted Advanced Micro Devices as its chief rival. These days, it’s looking more like Intel and Qualcomm will be going mano-a-mano.

Intel just announced it will license the core of its low-power chip, Atom, to contract chip manufacturer TSMC. The Taiwanese company will work closely with Intel to port some of the Atom processors to their own process and design flows. They also will have the ability to do some engineering on the chip to build customized versions for the large number of TSMC customers.

The companies were mum on additional details as they iron out the particulars of the memorandum of understanding.

While Intel says it retain full control of the process—essentially leaving TSMC as a contract manufacturer—the move clearly is aimed at stealing market share from British chip designer Arm, which licenses it products to Qualcomm, Texas Instruments, Freescale and other companies.

Analyst Jack Gold sums up the announcement pretty succinctly: Intel gets a vast new market potential for Atom since TSMC has connections to vendors who make many consumer and lower end PC-type products such as MIDs, webtop devices, netbooks, media servers and set-top boxes.

TSMC gets to offer a high-performance processor they did not have to design, but that they can customize for the clients who will take volume products. It also adds the ability to merge the work TSMC is doing on WiMax enabled devices and couple it with Atom processors.

For Intel, it removes the headache of creating customized products for each customer. Qualcomm and others have excelled in this category and have called Intel’s weakness in this areas its Achilles heel. The Intel-TSMC collaboration also could result in significantly lower price points for Atom products because of the shared research and development.

Why now? The economic downturn is accelerating the timetable in which the communications and computing markets will clash as each side seeks new growth opportunities.

That is forcing Intel to collaborate more with other industry titans, and it is setting up a bloody market battle that could lead to shifting alliances and a reconfiguration of both industries.

The game, as they say, is afoot.

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