Microsoft’s Digital Fate May Hinge on X-Factor
Determined to head off Sony Corp. in the battle to control digital entertainment, Microsoft Corp. Chairman Bill Gates is expected to unveil details Friday about his company’s secret video game machine, dubbed the X-Box.
The new machine, likely to be released in the United States next year, would rival Sony’s much-heralded PlayStation2 and would be a stripped-down computer that connects the television to the Internet.
Microsoft’s entry into the market reflects a fundamental shift in the computer world, away from personal computers and toward television and other digital appliances that are connected to the Net and to each other.
Although consumers today typically get onto the Internet through PCs, which are run mostly by Microsoft software, a growing number of people will be going online through TVs, cell phones and other digital devices.
Microsoft so far has yet to control the market for those devices as it has the PC, a lag that threatens its worldwide dominance.
“Microsoft knows that if it’s going to survive and flourish in the next 10 years, it needs to get its software inside everything,” said analyst Gerry Kaufhold of the research firm Cahners In-Stat Group. “If Microsoft doesn’t do something about the PlayStation now, they’re going to lose out to Sony. They can’t afford for that to happen.”
Indeed, the X-Box is only one of several key efforts the Redmond, Wash., giant recently has made to maintain its dominance across the Internet. Microsoft’s MSN Internet Service, for example, announced a partnership with Qualcomm Inc. to develop a line of “smart phones” and reached an agreement with AirTouch and other telephone carriers to transmit MSN e-mail and other services to their portable phone customers.
Something for Everyone
Devices like Sony’s new PlayStation2 aren’t just for playing games. They are billed as all-in-one entertainment centers that let people also listen to music CDs, watch DVD movies and surf the Web.
Microsoft officials Tuesday declined to comment on the X-Box. Gates is scheduled to speak at a game developer trade show Friday in San Jose, and sources say he will release details on the device then.
Analysts say the company’s push to get into the gaming world comes at a crucial time.
Today, the nearly $7-billion U.S. video game industry is controlled by Sony and its hot-selling PlayStation2: Sony holds 53% of the console market share, with an estimated 25 million PlayStations sold in the U.S. to date, and 70 million worldwide. And when Sony began selling the PlayStation2 in Asia earlier this week, consumers grabbed 980,000 units in only three days.
Microsoft is expected to spend billions of dollars to develop the X-Box, which has been described as a “game machine with the guts of a PC.”
It is unclear whether Microsoft will build the hardware itself or contract third-party manufacturers to build the box according to its specifications.
Industry insiders, though, say the X-Box has a microprocessor, a graphics chipset, a hard drive for storage, a port to connect to the Net and a customized operating system that is tailored for the video game machine.
While sources say the software retains elements of Microsoft’s Windows program, it works much faster than anything used on a PC.
Microsoft has lined up powerful technology through a group of companies that are helping it develop the X-Box, according to industry analysts, software developers and people working on the project.
The speedy microprocessor is being developed by Advanced Micro Devices Inc., the world’s No. 2 chip maker for PCs. Microsoft also has signed a license with GigaPixel, a start-up chip company in Santa Clara, Calif., that is known for developing high-performing, low-cost graphics technology.
Officials at AMD and GigaPixel declined to comment Tuesday.
Yet, GigaPixel already has relocated its engineering team into Microsoft’s WebTV offices in Mountain View, Calif., and Microsoft plans to make a “strategic” investment in the start-up company in the next several weeks.
Joining the Team
Nvidia Corp., a developer of graphics processors and a rival of GigaPixel, also is rumored to be tied to the X-Box project. The Santa Clara company saw its stock price jump 42% Tuesday amid speculation that Microsoft will use Nvidia’s 3-D graphics technology in the first generation of the X-Box.
Nvidia officials did not return calls Tuesday.
Game developers say that they were first approached by Microsoft officials about the X-Box late last summer. At the time, Microsoft had been wooing software makers to create titles for its new game machine, and help it surpass Sony, Nintendo Co. and Sega Enterprises Ltd.
“Microsoft has always had an interest in the video game industry,” said Van Baker, vice president of the e-business group at the research firm Dataquest. “Yes, it’s going to be a video game machine. But it’s also a strategic way to help [its] MSN become established as an Internet provider.”
MSN offers a range of content and services, including its popular MSN Gaming Zone site. Started in 1996, the Web site is the largest online PC gaming hub on the Net. Nearly 12 million subscribers pay $9.95 a month to play premium games such as “Asheron’s Call” or “Fighter Ace.” Or they can play traditional card and board games for free.
Additionally, the software giant is rapidly becoming one of the largest PC game makers in the world. Its “Age of Empires II” was the top selling PC game over Christmas, and it boasts three other PC games in the top 20, including the popular “Microsoft Flight Simulator” and “Motorcross Madness.”
Playing Hardball
Sales of Microsoft’s PC games have increased 50% annually over the past four years, and the company now controls about 10% of the PC game market, said Ed Fries, general manager of Microsoft’s games division.
“We want to be in the home just like we want to be in the office” with its Microsoft Office software, Fries said.
But by the time Microsoft gets its X-Box on the shelves next year, analysts say the competition for game-hungry consumers--already fierce--will be even more intense.
Sony’s PlayStation2 is expected to be sold in the U.S. by year’s end, as is Nintendo’s latest gaming device, known as the Dolphin. And Sega of America’s Dreamcast already has been released, and has sold nearly 5 million units worldwide.
“Microsoft may be coming late to the market, but they’re coming and they’re going to spend a lot of money,” said Cahners analyst Kaufhold. “You can’t underestimate Microsoft.”
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Times staff writer Stanley Holmes contributed to this report.
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