Microsoft's X-Box: Fight for the future?

As rumors fly about a Microsoft game console, one thing's clear: It has the team to make it.

This month's reports that Microsoft is working on a game console to rival Sony's PlayStation 2 came as little surprise to at least one industry executive.

"I guarantee you that if there's a group that knows how to build a video game machine, it's the one inside (Microsoft subsidiary) WebTV," said Hugh Martin, former CEO of 3DO Systems Inc., which challenged the established video game industry more than five years ago.

Martin, now CEO at Optical Networks Inc., should know. You see, those WebTV engineers used to work for him at 3DO.

If WebTV does produce the rumored console, it will mark the end of a long trek for those engineers.

Long journey
When Martin was at 3DO, it was a hot startup, bringing a 32-bit game console to market almost two years before Sony produced the PlayStation. But in 1996, 3DO faced the truth: It had lost the war, selling only a million units. It scrapped its plans for a 64-bit next-generation device, known as the M2, and sold its hardware division to Samsung, a Korean consumer electronics manufacturer.

Samsung had its new company, now called CagEnt, poised to excel in the PC graphics market, scoring deals with arcade machine maker Konami and semiconductor manufacturer Cirrus Logic. By spring 1997, however, both deals had crumbled and an ailing Samsung was looking to sell CagEnt.

After a near-miss with Nintendo, Samsung sold the group to WebTV, which was by then a Microsoft (Nasdaq:MSFT) subsidiary. The engineers, and almost all of the advanced graphics technology -- moved with the company. "Those guys are still there," said Martin. "They are inside WebTV in Palo Alto (Calif.)."

WebTV is open about why they bought CagEnt.

"(CagEnt) had both the intellectual property and people that we were interested in," said Alan Yates, director of marketing at WebTV Networks. While he would not confirm the existence of the X-Box project, Yates admitted, "You will see future versions of WebTV that will use the video capabilities that we acquired, as well as the 3-D capabilities."

Yates added that, while the technology was there to make an X-Box device, "our strategy right now is very, very clear: to provide additional functionality for TV."

That may change, and quickly, analysts said. With Sony using the PlayStation 2 as a "Trojan horse" to become the center of home entertainment, Microsoft should be looking at games as well.

"For Microsoft to get plugged into (the gaming console market) would not be a big stretch for them," said Jae Kim, analyst with entertainment technology watcher Paul Kagan Associates. "At the very least, it would provide another gateway into the living room."

Game developers think so, too.

"Can you see 200 million connections to the Internet and Microsoft not being a part of it?" asked one gaming industry source on condition of anonymity.

What about Dreamcast?
Still, some analysts doubted the reports, questioning why Microsoft would pursue a new game machine when its partner, Sega, has created a successful one already.

"Dreamcast meets all the goals they would set for such a device," said Peter Glaskowsky, graphics guru at chip technology researcher MicroDesign Resources Inc.

And Sega stresses that the working relationship with Microsoft could not be better. "Microsoft has been extremely supportive," said Charles Bellfield, director of marketing for Sega of America Inc. (OTC:SEGNY).

Bellfield could not confirm the rumors of the mysterious game device. "I am sure that Microsoft is developing a whole range of products that will never see the light of day."