Microsoft plays its boldest game with Xbox

CHARLES ARTHUR reports on the fight for games market supremacy.

If you were running an American company and had half-a-billion dollars lying around, what would seem like a good way to use it?

Invest in streamlining your business, perhaps, or bank it to weather the seemingly inevitable recession there?

Not Microsoft. It has chosen to put that money into an audacious strike into the games console market, the fiercely competitive sector dominated by rich Japanese companies, where hardware is essential yet sold at a loss, and where the users are young and prone to the whims of fashion.

And if you think that half-a-billion sounds like a lot of money, that's only the marketing budget. The spending on development of the product makes this easily the first billion-dollar product for your living room. And it will sell at a loss, about $125 on each one, analysts estimate.

The announcement was made at the computer gaming industry's big annual festival last week, called E3 (Electronic Entertainment Expo), in Los Angeles, the City of Angels. Microsoft may need one, of the guardian kind.

Amid a group of mock security guards in black-and-neon-green T-shirts, the corporation made a glitzy breakfast launch of its new Xbox games console, announcing the shipment date, price and a number of the games that will either ship or be available to buy with it.

Microsoft will have between 600,000 and 800,000 Xboxes ready to ship for $299 on November 8, and intends to have shipped between one million and 1.5 million units by the end of the Christmas season.

Robbie Bach, chief Xbox officer at Microsoft, says: "Xbox is going to change video games the way MTV changed music. Your games are never going to be the same."

It might be churlish to point it out, but MTV lost money for years. Certainly, though, Microsoft, after this lurch into selling real hardware, will never be the same.

"You can kind of think of the Xbox as being sort of like a Ferrari when some of the other consoles out there are like a Volkswagen or minivan," says Microsoft's John O'Rourke, the director of Xbox marketing. "Clearly, there has never been a better time to be a gamer."

That may be true, though it's hard to know which "other" consoles he could mean, unless it's those such as the first Sony PlayStation, released in 1995 and still in shops.

The question is, is it a good time to be getting in to making games consoles? The Xbox is a vast departure from Microsoft's normal line of business, which is to let computer makers fight among themselves to make cheap hardware while it makes huge profits from selling pure software.

If you want the comparison, Dell, now the world's largest PC maker, just pleased Wall Street by announcing first-quarter profits (to May 4) of $US462 million on revenue of $US8.03 billion - that is, 5.8 per cent.

Microsoft, for the quarter to March 31, announced revenue of $US6.46 billion. Its profits were $2.45 billion - that is, 37.9 per cent net earnings.

So why is Microsoft moving into a hardware market?

And why against such entrenched players as Sony - now king of the heap after the 1995 introduction of the PlayStation, followed last year by the PlayStation 2 - and Nintendo, which has millions of contented users who have grown up with its consoles and, especially, its handheld machines?

Richard Teversham, Microsoft's head of marketing for Xbox and games in Britain, says it is because two years ago Microsoft looked around and found that the platforms (company-speak for consoles) were limiting in terms of processor power and especially memory to write "great games."

That did not seem to have put people off before.

But Mr Teversham insists that developers essentially told Microsoft what to put in the box "so that games could take a quantum leap forward".

Apparently what they wanted was a Pentium 3 CPU, a top-speed high-resolution graphics chip, a DVD player, a hard disc that would not shame a PC and a high-speed connection that could use broadband phone systems (up to 20 times faster than existing modems).

Microsoft decided that despite its PC capabilities it should be only a games console. Interestingly, Sony seems to want its PlayStation 2 to be rather more than a games console.

Though it does not have a hard disc, it does have a "Firewire" connector (useful for connecting video cameras, or hard discs) and a broadband connector.

Last week, Sony said it would also provide a liquid-crystal display, keyboard, hard drive and even computer software that would make it more than a games machine.

"I don't know what that's about," says Mr Teversham.

Sony is not letting on what it's about either. But again, why hardware, and why now?

Mr Teversham says: "Microsoft's philosophy is always to make something that is easier to use and more accessible to more people, whether it's in software or hardware - we have made games controllers in the past." True, but those are not billion-dollar projects; they are just $100 rebadged products from the Far East.

"Well, Xbox is a very, very long-term project," he says. "It's going to be there for seven to 10 years. It's a very future-oriented console, with the capacity for surround sound and great graphics."