Microsoft opens Xbox secrets

The company plans to have 600,000 to 800,000 consoles at launch, in hopes of avoiding shortages that plagued Sony's PlayStation 2 last fall. Microsoft expects to sell 1 million to 1.5 million consoles by the end of the year, the company said.

The details released Wednesday are the last significant ones to emerge as part of Microsoft's high-profile effort to extend its technology dominance beyond the PC.

The Redmond, Wash.-based behemoth also introduced more than two dozen companies working with it on Xbox.

Game makers lining up behind Microsoft's new system include Bandai, Electronic Arts, LucasArts Entertainment, Sega Entertainment and Ubisoft.

Microsoft expects there will be 15 to 20 software titles at launch. Among the first online games to be available on the new gaming system will be Sega Sports' entire 2K3 lineup, "Tony Hawk Pro Skater 3," "Unreal Championship" and "Tom Clancy's Ghost Recon."

Backed by a $500 million marketing campaign--the most money the software giant has ever spent to launch a new product--and hardware comparable to that of a midrange PC, the Xbox will allow Microsoft to not only grab a chunk of the more than $10 billion annual market for video games but also gain a toehold in emerging forms of digital entertainment. The console will ship with a 10GB hard drive and broadband Internet connectivity, potentially allowing owners to use it for purposes beyond gaming.

Online content is expected to emerge as a major front in the battle among console makers, following Sony's announcements this week that it will join with America Online to supply Internet services to the PlayStation 2 and that it will work with Cisco Systems.

Both the GameCube and Xbox will ship with Ethernet ports that will allow connections to broadband services. Nintendo hasn't revealed any plans for online content. Microsoft has formed a partnership with Japanese telecommunications giant NTT Communications to develop online services for the Xbox.

In setting Xbox's price, analysts had expected Microsoft to stick close to its main competitor, Sony, whose PlayStation 2 console sells for $299. Microsoft will still lose an estimated $125 per unit at that price because of the standard game industry practice of relying on game royalties to subsidize the cost of making hardware.

Microsoft's challenge is to set the Xbox price as high as possible without undercutting its competitive position, IDC analyst Schelley Olhava said, noting that there's only one direction a game company can go once a price has been set.

"The expectation in the video game market is that once the product has been out for a while, you start cutting the price. You can't go the other way," she said. "I wouldn't really be surprised if Sony decided to chop the price of the PlayStation 2 to $279."

Merrill Lynch analyst Henry Blodget wrote in a report Wednesday morning that "Microsoft has yet to provide financial targets for Xbox, other than to say that gross margins will be negative. This means that the more units Microsoft sells, the more money the company will lose on Xbox" at least in the short run.

Blodget added that Microsoft's enthusiasm and massive investment in Xbox is likely to make the gaming system a "key driver" of the company's stock during the next few months.

Besides Sony, Microsoft faces less certain competition from Nintendo, which is expected to release similar details on its upcoming GameCube later Wednesday. GameCube, originally called Dolphin, was set to debut late last year as a successor to Nintendo's N64 console. The hardware has been delayed several times, putting Nintendo in the unenviable position of competing with an entrenched market leader in Sony and a well-funded newcomer in Microsoft.

While the GameCube's hardware is less powerful than Xbox's--the console has a slower processor and no hard drive--that shouldn't matter much if Nintendo delivers fun, good-looking games, Olhava said.

"It isn't really a question of power," she said. "It's not like the PC market, where the best piece of hardware wins. It's about the games: Can it provide gamers with a good gaming experience?"

Other companies queuing up behind Xbox include Activision, Eidos Interactive, Rage Software, TDK Systems and THQ.

Staff writer Sandeep Junnarkar contributed to this report.