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Microsoft Prepares For Game Console Dogfight

Microsoft is gearing up for a dogfight. It wants its forthcoming Xbox 360 to be the alpha male among gamers. But it will have to go over the Sony PlayStation 3 to get there.

Redmond hopes connecting the Xbox to the television and the Internet will help it unseat Sony. In May, it unveiled Xbox 360, its next-generation game machine, expected to ship for the 2005 holiday season.

And Sony's PlayStation 3 is due in spring 2006. Microsoft games, such as its killer Halo series, will be the main attraction, but Xbox 360 will act as a media platform.

"This is a dogfight between ourselves and Sony," Bryan Lee, Microsoft's vice president for home entertainment, said at a Piper Jaffray analysts' conference on Tuesday.

But there could be another dogfight -- an internal one. Could Xbox 360 eat into the market for Windows Media Center?

"There is the possibility that Xbox could cannibalize the Windows Media Center business -- the only difference [in functionality] being television content itself," said tech analyst Rob Enderle. "If you want personal video recording capabilities or want to buy movies online and move them around the home, the Xbox won't do that."

The Xbox 360 will ship with built-in playback of CD music and photos, while it accepts digital files from MP3 players, digital cameras and Windows XP PCs equipped with a USB 2.0 port, letting Xboxers stream content from the peripheral device through the game console and out to the HDTV.

Microsoft said the Xbox 360 also would play progressive-scan DVD movies.

All games will be optimized for wide-screen digital televisions, while the game system connects out of the box to broadband and basic Xbox Live service.

Players can send and receive text and voice messages or engage in live voice chat; they can download demos, trailers and game enhancements from the Xbox Live Marketplace. The premium, paid version of Xbox Live adds video chat and multiplayer games.

Lee said Xbox Live would provide new revenue opportunities for game publishers, such as multiplayer games, episodic titles and inexpensive one-play-only games.

But what Lee didn't talk about was a possible collision between Xbox 360 and Windows Media Center.

PCs running Windows XP Media Center Edition have advanced capabilities for managing multimedia. Microsoft began hyping Media Center Edition before it shipped it to OEMs in September 2002.

Microsoft's vision for consumers is a PC in nearly every room -- except, probably, the bathroom. With the addition of a Media Extender device, the Media Center PC can act as a mini-server, sending digital multimedia to televisions throughout the house.

The rosy part of this vision for Microsoft is selling more software for all those computers. Will Poole, senior vice president of Microsoft's Windows client business , recently promised computer makers that the dismal 4 percent annual refresh rate for corporate PCs could be offset by sales of Media Center machines.

But households with one or more PCs already might find that an Xbox gave them most of the multimedia functions they wanted at a third of the price, Enderle said. (JupiterResearch, which is owned by the same corporation as internetnews.com, says home PC penetration should reach 75 percent by the end of this year; it pegs digital video recorder penetration at 4 percent.)

"If you have an Xbox," Enderle said, "you have the ability to watch DVDs, remote control your MP3 player, use [the Xbox] as a way to move music around and put music on the Xbox itself."

But JupiterResearch analyst Joe Wilcox didn't see it quite that way.

"Xbox will have media center capabilities built in, but you can't record TV shows. It's not a DVR," he said. "You could ask the same question about a regular PC. If I have a TV and a DVR, why would I need a Media Center PC?"

Wilcox's theory -- and Microsoft's evidently -- is, "If you have A, it's good; if you have A, B and C, it's even better."

Enderle said the possible product collision is due to a disconnect between various Microsoft divisions, each of which is responsible for its own profit and loss.

"Microsoft is looking more like IBM in terms of different divisions doing things that would seem counter-strategic to the entire company and particularly to other divisions," Enderle said.

According to Enderle, the Xbox and Windows divisions did try to work it out. The true product conflict, he said, exists at the Media Extender level. "Xbox becomes the perfect Media Extender. Why would I want to pay $300 for the Extender when I can buy an X?"

In terms of the Xbox's contribution to Microsoft's profits, Lee promised that the console economics will be substantially better.

While the original Xbox was sharply priced as a new entry in the market, the new console will be sold at an undisclosed, break-even price, with games and online services offered at a profit.

Lee said about 10 percent of current Xbox owners subscribe to the Live service; Microsoft hopes to boost that figure to 30 percent over the lifetime of the 360, while adding about 10 percent to game publishers' revenue.