March 10, 2000 8:40 AM PST

Microsoft takes the mystery out of Xbox

Microsoft today officially announced its first gaming console, called the Xbox, the latest sign that the computing industry is gearing up for a future beyond the PC.

As previously reported, Microsoft chairman Bill Gates is scheduled to unveil a prototype of the Xbox at the Game Developers Conference today in San Jose, Calif.

Microsoft's decision to develop and release a gaming console--which includes a DVD drive, Internet access, and some of the most powerful PC technology available--is based in a larger trend of PC firms looking to tap business in the next-generation home entertainment market.

The Xbox is the company's first major hardware project, and as such will face stiff competition from Sony and other established game console makers, analysts said. Microsoft has for years sold mice, keyboards, joysticks and other hardware accessories, but never a full computing system.

"Sony, Nintendo and Sega all have significant leads in the business," said Billy Pidgeon, an analyst with Jupiter Communications. "And this is the first time Microsoft is getting into the hardware business." Xbox will compete directly with Sony's PlayStation 2 and Sega's Dreamcast.

The Xbox also reflects Microsoft?s desire to tap the growing market for devices that combine the entertainment value of television and the computing power of the Internet. Analysts and industry pundits alike have touted such ?convergence? devices, such as set-top boxes and gaming consoles, as the future of home entertainment. So far, consumers are proving them right.

The Xbox uses Microsoft's DirectX multimedia application development technology, but it is not clear yet what operating system the console will feature. Microsoft is not expected to use either its Windows CE operating system for set-top boxes and handheld computers or its Windows 2000 operating system for corporations and servers.

Still, the specifications of the Xbox are impressive. As previously reported, the Xbox will use a Pentium III processor from Intel and a custom 3D graphics processor from Nvidia; it will feature 64MB of memory, an 8GB hard drive, a DVD drive and an Ethernet connection for high-speed Internet access.

With hardware that sounds more at home in a PC, analysts question how Microsoft will keep the price of the Xbox competitive. The company has not yet announced pricing. Pidgeon said he expected the system to be priced around $300, which is typical of competing game consoles. That cost typically represents about half of the manufacturing cost of the console. Sega and Sony make up some of that loss through the sale of individual games, Pidgeon said.

Sony is also banking heavily on the convergence trend but is off to a rocky start. In the first three days since its PlayStation 2 was released in Japan, Sony sold 980,000 units, an impressive number but still short of the company's expectations. Sony also confirmed this week that the memory cards in some of the units may be defective.

Both PlayStation 2 and Dreamcast will have already been on the market for more than a year when Microsoft finally stocks its Xbox on shelves in 2001. That delay could exacerbate another challenge for Microsoft: enlisting game developers.

Microsoft, which today also announced that Electronic Arts, Acclaim Entertainment and Eidos Interactive will be developing Xbox games, does not yet have the legions of game developers that Sony and Sega rely upon to drive sales of their consoles.

To jump-start game production, Microsoft today established a new games division, headed by Robbie Bach, vice president of Microsoft's Home and Retail division.

For Microsoft to entertain any hopes that the Xbox will be the centerpiece of a home entertainment strategy, it must first sell tens of millions of units, Pidgeon said. And it can't sell units without compelling game titles.

"Basically, the game consoles that are going to succeed are going to excel at the primary function of a game console, which is great games," Pidgeon said.

 

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