More Xbox Details Expected at E3

Microsoft Corp. is expected to reveal more information — including an
availability date and pricing — about its upcoming Xbox game console at the
E3 Game Expo in Los Angeles Wednesday.

Watchers of the software behemoth are awaiting information with bated
breath. The Xbox is one of the company’s first forays into hardware, and it
is a bit of a gamble for the company as each console shipped is expected to
lose the company money. But makers of game consoles these days see the
machines as more than just boxes that use flickering lights to turn kids
into zombies — the companies envision consoles that are the central hub of
families’ entertainment systems.

That was the vision behind Sony Computer Entertainment Inc.’s Sony
PlayStation2, which not only runs games and plays music CDs, it also doubles
as a DVD-Player. And an add-on modem can turn the device into an Internet
appliance for surfing the Web or playing games online. Users can even buy a
keyboard and mouse to use with the console.

Sony rival, Sega, was headed in the same direction. It outfitted its
first-to-market Dreamcast with a modem and was the first to build out a
networked gaming arena, SegaNet. But the economic realities of the console
market — companies typically lose money on each console and make up the
difference in royalties and selling their own games — apparently drove Sega
out of the console market. In January, it said it would restructure with a
three-pronged strategy: it would become a platform-agnostic third party
videogame publisher for game consoles, focus on SegaNet, and become an
architecture provider of its Dreamcast chip-set technology. It announced
plans to license its technology to Pace Micro Technology, which intends to
manufacture a Dreamcast-compatible set-top box of its own, and bring Sega
games to Palm handheld computers and Java-enabled Motorola phones.

Meanwhile, Microsoft is aiming to take over the space vacated by Sega and
take on Sony. It has deeper pockets than Sega, and its Xbox will hit the
market with the most advanced technology in the industry. It will feature an
Intel 733 MHz processor, nVidia 250 MHz graphics processor, 64 MB RAM,
DVD-ROM, a 10 GB hard drive and broadband connectivity. In contrast, the
PlayStation2 features a 300 MHz processor, 150 MHz graphics processor, 32 MB
RAM and DVD-ROM.

Still, Sony has an advantage over Microsoft in the area: history. Sony has a
larger installed user base, and a much larger selection of games — the real
currency of the game console arena. Indeed, PlayStation2 is backwards
compatible. It is capable of playing original PlayStation games, making its
list of game titles years deep.

“…the Xbox will likely have a dozen or so game titles at product launch
with 50 or more expected within several months of the product launch,”
Goldman Sachs & Co. said in research.

GS said it expects Microsoft’s Xbox to hit store shelves in early November,
and predicted the company will sell roughly 1-2 million units of the Xbox
for Christmas 2001. It also expects Microsoft to sell 5-10 million units in
2002.

“Microsoft has indicated previously that it plans to launch Xbox in Japan
and the U.S. for Christmas 2001 and Europe in Spring 2002,” GS said.

GS acknowledged that the company will likely lose money on every console
shipped, but said that should be somewhat offset by royalties from game
developers.

“We expect Microsoft to record revenues on a gross basis, with cost of sales
exceeding revenues during the first year of product availability,” GS said.
“This could depress operating margins 2-3 percent depending on the volumes
and mitigating factors such as game revenues/royalties and cost cutting
efforts in other parts of its business. We have assumed a rather late
introduction of early November and relatively low initial volume of 1-2
million units in the December quarter. While somewhat negative for earnings,
we believe the product launch likely following a few weeks behind Windows XP
will be a positive event for investor sentiment.”

Microsoft has indicated that it will spend $500 million marketing, promoting
and launching the Xbox in its first 18 months.

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