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News > Technology
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Microsoft launches Xbox
graphic November 15, 2001: 1:03 p.m. ET

Software company hopes to reach new users with its gaming console.
By Staff Writer Chris Morris
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  • Microsoft Xbox
  • Sony PlayStation
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    NEW YORK (CNNmoney) - Round two of the video game wars starts Thursday as Microsoft rolls its Xbox onto store shelves. The gaming console, which sells for $299, faces stiff competition from Sony's PlayStation 2 and debuts just three days before Nintendo is scheduled to introduce its own new machine.

    The simultaneous introduction of two gaming systems should eliminate the holiday shortage consumers faced last year when the PS2 was the only game in town. But it also ups the long-term stakes for the manufacturers of the machines.

    "Microsoft has recognized that owning a significant piece of real estate in the living room is key to them being a winner in digital entertainment," said John Taylor, managing director and analyst for Arcadia Investment Corp. "This is a strategic investment and part of a long-term plan for them."

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    Tecmo's "Dead or Alive 3" is expected to be a big seller.
    Amazingly crisp graphics are de rigueur for today's consoles. And both the PS2 and the Xbox offer the ability to play DVDs, in addition to games. Microsoft (MSFT: down $0.37 to $65.75, Research, Estimates) is hoping to make its machine stand out, though, with features such as Dolby 5.1 surround sound, an 8 GB hard drive (eliminating the need for gamers to buy $25-to-$35 memory cards) and a built-in Ethernet port, which will allow users to utilize high-speed Internet connections when the Xbox's online network launches.

    It's also hitting stores supported by a sizable, and notable, selection of games. "Dead or Alive 3," "Halo" and "Shrek" are among the 15-to-20 titles that are accompanying the console to retail. By year's end, the company hopes to have shipped 30 titles.

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      graphic Watch a scene from Nintendo's Rogue Leader game.

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    Both Sony and Nintendo have "signature" characters - gaming icons that are tied closely with their machines. For the PlayStation, it's Crash Bandicoot. Nintendo has Mario. So far, there are no break-out characters for the Xbox.

    "The 'Oddworld' series is a potential franchise and 'Halo' is a potential storyline that could become a franchise," said Taylor, "but I'm not sure I see a character franchise yet that would liken to a Sonic or Crash or Mario."

    Microsoft says it's not worried, but it's not downplaying the impact those characters can have.

    "What a character game gives you is it makes it much easier for you to brand (your console)," said John O'Rourke, director of games marketing for the Xbox. "We don't have to have it to be successful. But we'd like to have it."

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    Sports games like EA's "Madden 2002" are always popular among gamers.
    Like the PS2, pre-orders for the Xbox sold quickly at many retailers. Microsoft, however, has been coy about the exact number of units they are shipping. Initial estimates by the company were set between 600,000 and 800,000. Analysts now say the number is likely to be closer to 300,000, although the company should have 1 million to 1.5 million available by year's end.

    "In the past with other video game systems, you've had to have them shipped over on a boat," said O'Rourke. "We're delivering them day after day after day. And having a regular flow, versus a chunky distribution system is better for the retailer - and the gamer."

    The fight for gamers is expected to be a significant one - and no analysts expect Microsoft to come out on top. Just last week, Morgan Stanley analyst Mary Meeker predicted the Redmond, Wash.-based company will lose $1 billion before breaking even in 2004.

    Meeker added, though, that the console may be a long-term opportunity. And it's that long-term view that might work to Microsoft's advantage.

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      graphic Allen Wastler from CNN/Money.com chats with Microsoft's Robbie Bach about Xbox and the video game market.

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    Robbie Bach, chief Xbox officer, told CNN/Money that "sales rates are going to be a little bit less important. What's really important is how we're setting up for the next two, three, four years."

    Gaming console machines are typically loss leaders for companies. (The $299 Xbox, for example, runs on a 733 MHz Intel processor, has 64 MB of RAM and a state of the art video card from nVidia. A PC with similar features would retail for anywhere from $500 to $700.) The real money in the gaming business is the games.

    Several of the most anticipated titles for the Xbox, such as "Halo" and "NFL Fever 2002," were developed in-house, meaning Microsoft keeps the majority of the $40-to-$50 price tag. Third-party developed titles, such as "Dead or Alive 3" and "Shrek," must pay a licensing fee to Microsoft for each copy they sell. The company won't reveal how much, but analysts say it ranges between $7 to $9 for each game sold at retail.

    The Xbox, if successful, also gives Microsoft another entry into the home, this time in the living room. While the company insists the console is solely a gaming device, it's a virtual certainty that Microsoft will offer Internet browsing and instant messaging when it launches its online unit.

    But the company first has to overcome the poor showing it made in May at the Electronic Entertainment Expo, the trade show of the computer and video gaming industry. Instead of winning fans among retailers and industry insiders, Microsoft stumbled, displaying games that were graphically unimpressive, offered spotty performance and were less than addicting.

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    Shrek makes his gaming debut on the Xbox.
    In the weeks leading up to the Xbox's launch, though, a different buzz began to grow around the console and its much improved graphics.

    "At E3, people came out saying Nintendo is going to do much better than Microsoft," says Mike Wallace, an analyst with UBS Securities. "But over the last month or two, people have turned around ... (Microsoft) will give Nintendo a good run for the No. 2 spot."

    Pre-orders have been picking up, as well. When Toys 'R' Us.com initially began taking reservations for the console during Labor Day weekend, it took 30 minutes for them to reach their pre-set limit. The consoles sold out even quicker in subsequent rounds of pre-orders.

    Sony remains the biggest obstacle for the company. With 80 million PlayStation machines and 20 million PlayStation 2 machines already in homes across the world, it has a firmly established, loyal base of customers.

    "At this point, neither Microsoft nor Nintendo have a chance at catching Sony," said Wallace. "What they're trying to do is carve out their own part of the market ... Microsoft's goal is to get established, then it will shoot for the number one slot in the next round of machines, around 2005." graphic

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