I was going to post this ot the GMST board first, but I believe this affects a lot of other stocks so will post here.
Microsoft's `X-Box' has potential to redefine the course of gaming
BY JON FORTT
Mercury News Staff Writer
Microsoft Corp. has decided to take games very seriously.
Microsoft Chairman Bill Gates is expected to divulge details Friday about a secret project code-named ``X-Box' -- the console Microsoft hopes will give it the supremacy in video games that it has achieved in the PC industry.
Sources familiar with Microsoft's plans say the company is prepared to tap into its vast resources and spend billions to rule this new arena, now dominated by Sony Corp.'s PlayStation console. Since summer, the Redmond, Wash.-based software giant has been quizzing game developers, asking how Microsoft might build a platform that surpasses the latest efforts from Sony, Nintendo Co. and Sega Enterprises Ltd. X-Box will probably go on sale sometime next year.
Why should Gates care about machines that play products with names like Final Fantasy VII and Zombie Revenge? Because video games, which generated $7 billion last year in the United States alone, could soon threaten Microsoft's core business on the Internet. Sony is billing the PlayStation 2, released in Japan Saturday and due in the United States this fall, as an entertainment center that not only plays video games but also plays music CDs and DVD movies, and surfs the Web.
If Sony succeeds with PlayStation 2 -- and one in four U.S. homes already owns the original PlayStation -- Microsoft could eventually lose its PC-based position as the main on-ramp to the Internet.
Microsoft has so far kept quiet about the X-Box project, and has asked game developers to do the same. But the video game community is still buzzing in anticipation of the annual Game Developers Conference this week in San Jose, where Gates is scheduled to make a presentation Friday. One source said that Microsoft demonstrated the power of the X-Box by having it display a scene in which pingpong balls bounce wildly in a room full of mouse traps. He said the level of speed and detail is ``dramatically better' than the PlayStation 2, the most advanced system on the market today.
The X-Box console has the innards of a high-performance computer, say people close to Microsoft. It has a processor that's 600 MHz or faster, 128 MB of memory, a port for connecting to the Internet and a new version of the Windows operating system outfitted specifically for a game console (it boots up in just a couple of seconds, rather than minutes).
``Microsoft has always wanted to have influence on, if not be a leader in, video game activity,' said Richard Doherty, founder of market research firm Envisioneering Inc. in Seaford, N.Y. ``The underlying element of all this is, yes it's a video game, but it's also the home entertainment hub of tomorrow.'
A handful of companies are already developing games for the X-Box console, which industry analysts expect no sooner than next year.
Considering Microsoft's deep pockets and its reputation as a tenacious competitor, X-Box has the potential to redefine the course of gaming. Granted, gaming industry leader Sony is a $128 billion company that both designs and manufactures electronic equipment, and has interests in movies, music and television. But Microsoft, a $470 billion company, is far bigger than Sony, Nintendo and Sega put together.
Microsoft might need those deep pockets to compete in the video game console market. Sony's marketing strategy with the original PlayStation in 1994 was to sell the $299 box at very low margins, banking on royalties from video game software to bring in much revenue, said Corey Wade, research director for video games at Alexander & Associates in New York. It worked. Sony has made about $5 billion from game software, both from selling its own PlayStation titles and collecting a $7 royalty on each third-party game sold.
As more advanced systems come to market, they're following the original PlayStation's lead: PlayStation 2 retails for $360. Microsoft is used to competitive pricing. In a joint venture with EchoStar Communications Corp., Microsoft helps subsidize about $150 worth of a digital satellite dish player that sells for as little as $99. The dish works with WebTV and carries a basic service for $19.95 per month.
``It's the old razor blade strategy,' said Gary Arlen, president of research firm Arlen Communications Inc. in Bethesda, Md., referring to the marketing tactic of selling consumers razors cheaply in order to sell them razor blades later.
Microsoft's move into video game consoles comes at a strategic moment. Every few years console makers and software designers go back to the drawing board to incorporate the latest technology, and upstarts have a chance to seize the crown.
In 1987, Nintendo dethroned Atari Corp. and led a renaissance in gaming. Eight years later, newcomer Sony unseated Nintendo.
This time around, the video game console industry is adjusting to better graphics technology and the Internet. The original PlayStation could generate game images at a rate of 360,000 polygons per second; the Sega Dreamcast, released in September, can handle 3 million polygons per second.
As the first next-generation console to hit the market, the Dreamcast's popularity surprised everyone, including Sega: It pre-sold 300,000 units, breaking the previous record of 100,000, held by the original Playstation. Sega went on to sell about 1 million units by Thanksgiving, a month faster than expected.
Sega may have merely primed the market for Sony. More than 1 million of Sony's PlayStation 2 consoles sold ahead of Saturday's launch date in Japan, apparently at the Dreamcast's expense. Sega warned last week that Dreamcast sales for Japan in the next six months will probably reach just half the expected 1.1 million.
The Dreamcast, it seems, may be the victim of better technology. PlayStation 2 can generate 20 million polygons per second. And Nintendo's next system, due this Christmas, could be even more powerful.
Building consoles to compete with these new systems is clearly not Microsoft's core competency. Microsoft is primarily a software company. That's not to say, however, that this is completely new territory.
Rick Thompson, the vice president of Microsoft's hardware unit who led the development of the company's successful keyboards and joysticks, is working on the X-Box team. Microsoft has a couple of very popular games for the PC platform, Age Of Empires II: The Age of Kings and Microsoft Flight Simulator 2000.
And Microsoft's MSN Gaming Zone site, launched in 1996, is the largest online PC gaming site on the Internet, boasting 10 million members. Hard-core gamers pay a $9.95 monthly fee to compete against each other in the premium games, which include Asheron's Call and Fighter Ace.
What's more, visitors use the site for an average approaching 40 minutes per day, a rate second only to America Online, according to online measurement firm Media Metrix.
But perhaps most important for Microsoft, it has lots of experience working with video game developers, the artist/programmers whose work can make or break a console in the marketplace. Each console has a set of tools that developers use to create games, a process that has grown more complicated and expensive as consoles handle more stunning graphics. By one estimate, developing a strong title for the PlayStation 2 will cost at least $3 million.
``The biggest cost is people. It's definitely people,' said Yves Blehaut, senior vice president for business development at Infogrames Entertainment Inc., a leading game developer based in Lyon, France, with offices in San Jose. ``If you sell under 400,000 units worldwide, it's difficult to make money on a product.'
So part of Microsoft's X-Box strategy involves updating the tools game developers already use for Windows PC games, and thus speeding development time, said one source close to Microsoft. Games that would otherwise take months to convert from one platform to another can be outfitted for the X-Box in a little more than a week.
Blehaut said that kind of functionality would be great news for developers, either allowing them to produce games faster or to spend more time improving the product. Add in the prospect of multi-player action via the Internet, and you have a whole new landscape in gaming and entertainment -- due sometime around the end of 2001, when the Dreamcast, PlayStation 2, Nintendo Dolphin and X-Box could all be competing on store shelves.
``I think the console that is a mix of off- and online will be the winner. And I cannot tell you if it will be Sony, Microsoft, Sega or Nintendo,' Blehaut said.
``Infogrames supports and develops for any hardware manufacturer that supports their own hardware. It's important that they have good technology, reputation, marketing and tools that allow the developer to do a good job. Sony, when they entered the market in 1994, was pretty good at that. Microsoft, if they want to have their software publishers behind them, they will have to do the same. So it's not a coincidence that Bill Gates is speaking. It's a clear sign.'
Good luck
Don
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