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Microsoft To Invest $1B in Online Xbox Gaming

By Elizabeth Millard
May 20, 2002 3:27 PM PT

Although Microsoft had to cut the price of its Xbox console last week to keep pace with rival Sony in the gaming hardware market, the company is poised to announce a US$1 billion investment in an online game service that could smoke the competition.

Microsoft To Invest $1B in Online Xbox Gaming

The Redmond, Washington-based software giant is aiming to become the biggest player in a fast-growing market. Its new service, called Xbox Live, will let users subscribe to an online network to play games with each other.

Although Microsoft already hosts some subscription-based role-playing competitions on its gaming site, Xbox Live could represent a giant step toward integrating game consoles with their online counterparts.

"It could make online gaming a standard part of using console gaming," Jupiter Media Metrix research director Michael Gartenberg told the E-Commerce Times. "This is going to be really significant."

Plug and Play

It seems that the market is chock full of gamers just waiting to log in and start playing. Jupiter Media Metrix has projected that online gaming revenue could top $2.5 billion by 2006, with most of that coming from subscriptions.

Market research firm IDC also has predicted rosy numbers, reporting that online gaming revenue is likely to increase about 50 percent annually.

Gartenberg said Microsoft could see a major financial boost from its new effort.

"Microsoft is going to do a land grab here," he said. "There are people already looking for a great online gaming experience, and that's who they're going to reach at first. It might only be in the tens of thousands this year, but it's a number that will definitely grow as people look to use broadband more."

Game Almost Over

The prospects for Microsoft's Xbox console looked less bright last week, when Microsoft had to cut the device's price from $299 to $199 to compete with similar price cuts from competitor Sony. Rival Nintendo followed suit with its own price cut on its GameCube console, from $199 to $149.95.

Microsoft was thought by many analysts to be barely holding its own in the gaming console wars. The company has sold only about 3.5 million to 4 million Xbox consoles in 2002 -- only slightly below Nintendo's 4.5 million GameCube sales but far below the staggering 30 million sales of Sony's PlayStation 2.

But the software titan's high-profile entry into online gaming could change the playing field.

Eyeing the Competition

"Sony is going to have a bit of a battle here," Gartenberg said. The Xbox comes with a broadband adapter for online game playing, but other game consoles do not, requiring consumers to buy an adapter separately. Gamers who are not keen on hunting down adapters could drive more sales toward Microsoft.

Sony and Nintendo have online ambitions as well and already possess some networked games. They are each expected to announce further plans at the annual Electronic Entertainment Expo (E3), which starts Tuesday in Los Angeles.

"Up until now, online gaming has been a fragmented effort," Gartenberg said, noting that the Xbox Live network could be a unified model that others follow. "Microsoft is leading the way forward. This is going to change the way things advance, without a doubt."

Microsoft officials were unavailable for comment, but a Webcast of the Xbox Live announcement is due to be shown Monday evening on the Xbox.com Web site.

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