AUSTIN, Texas, July 25 (Reuters) - Inside Amazon.com's

chip lab in Austin, Texas, half a dozen engineers on a

Friday afternoon put a closely guarded new server design through

its paces.

The server was packed with Amazon's ( AMZN ) artificial intelligence

chips that compete with those from market leader Nvidia ( NVDA )

, Amazon ( AMZN ) executive Rami Sinno said on Friday, during a

visit to the lab.

Amazon ( AMZN ) is developing its own processors to limit its

reliance on costly Nvidia ( NVDA ) chips - the so-called Nvidia ( NVDA ) tax -

that power some of the artificial intelligence cloud business at

its Amazon Web Services, the main growth driver.

Through its homegrown chips, Amazon ( AMZN ) wants to help customers

compute complex calculations and process enormous amounts of

data more cheaply.

Its rivals Microsoft ( MSFT ) and Alphabet are

doing the same.

Sinno, the director of engineering for Amazon's ( AMZN ) Annapurna

Labs that is a part of its cloud business AWS, said Amazon's ( AMZN )

customers were increasingly demanding cheaper alternatives to

Nvidia ( NVDA ).

Amazon ( AMZN ) bought Annapurna labs in 2015.

While the company's AI chip efforts are nascent, Amazon's ( AMZN )

workhorse chip Graviton that performs non-AI computing has been

under development for nearly a decade and is on its fourth

generation. The AI chips, Trainium and Inferentia, are newer

designs.

"So the offering of up to 40%, 50% in some cases of improved

price (and) performance - so it should be half as expensive as

running that same model with Nvidia ( NVDA )," David Brown, Vice

President, Compute and Networking at AWS said on Tuesday.

Sales at AWS, which accounts for just under a fifth of

Amazon's ( AMZN ) overall revenue, surged 17% to $25 billion in the

January-March quarter, compared with a year earlier. AWS

controls roughly a third of the cloud computing market, with

Microsoft's ( MSFT ) Azure holding about 25%.

During its recent Prime Day, Amazon ( AMZN ) deployed a quarter

million Graviton chips and 80,000 of its custom AI chips to

handle the surge in activity across its platforms, the company

said.

The shopping event generated a record $14.2 billion in

sales, according to Adobe Analytics.