Intel, the world's largest chipmaker, is to team up with Micron to make flash memory chips for Apple iPod Nanos.
Apple's iPod Nano uses flash chips
Two companies will each contribute $1.2bn in a joint venture to produce the flash memory chips used by many MP3 music players and digital cameras.
The move will challenge Samsung and Toshiba, who currently dominate the market for flash memory.
And Apple has signed deals worth $1.25bn to secure future supplies of the memory chips with all four firms.
Demand for NAND flash memory chips is growing by 30% a year.
The appeal of the chips is that they retain memory even when power is turned off.
They are used in Apple's recently introduced iPod Nano.
"It's critical that (Apple) tie up capacity," said Jefferies & Co. analyst John Lau. "They need to secure a reliable source to fund their continued expansion into this area."
Apple had unsuccessful talks with Samsung earlier in the year.
"The creation of this new company supports Intel's intent to maintain its industry-leading position in nonvolatile memory and enables us to rapidly enter a fast-growing portion of the flash market segment," said Paul Otellini, Intel president and chief executive.
Initial production by the company is expected to begin in early 2006, at Micron plants in Boise, Idaho, Manassas, Virginia, and Lehi, Utah.
Eventually the two companies said they would invest an additional $2.8bn.