Report: Microsoft to demonstrate Xbox

At the Consumer Electronics Show in Las Vegas Saturday, Microsoft Chairman Bill Gates will show the first mock-up of the company's Xbox video-game console, due out next fall, and provide the first live demonstration of its technology. The greenish-black box uses personal-computer processors and a hard drive, a break from past industry practice that could help produce game graphics comparable to "Toy Story," the animated movie.

Microsoft (msft) also plans to formally announce the arrival of Ultimate TV, a satellite-based interactive-television service offered in conjunction with DirecTV, owned by General Motors Corp. unit Hughes Electronics Corp., and receiver manufacturers Sony Corp. and Thomson Multimedia SA's RCA. Those devices initially were expected before Christmas, but Microsoft now is predicting limited shipments this month and wide availability in February.

The two initiatives are critical to the Redmond, Wash., software giant's long and sometimes painful struggle to build a franchise beyond the personal computer. While important in their own right, the two boxes increasingly are seen as building blocks for future home networks that could connect multiple consumer devices and the Internet.

Using high-speed Internet or satellite connections, for example, Xbox and Ultimate TV eventually could be linked with PCs and used to download and exchange software, as well as videos and other programming.

"This is the home portal," declared Richard Doherty, an analyst with Envisioneering Group, a market-research firm in Seaford, N.Y.

Many obstacles remain. Microsoft has been discussing various forms of interactive TV since 1993, and claims only one million users to date for its first offering in the field, WebTV. Xbox, in particular, puts the company in the unfamiliar role of selling a major piece of hardware.

It also faces heavy competition. Sony, for example, has a head start with its own PlayStation 2, the new game machine that also can be upgraded with communications capabilities and other add-ons.

But each of the Microsoft-designed machines has new features that are likely to have an impact. Ultimate TV, for example, has two TV tuners as well as a hard disk. It can pause live programs and fast-forward through commercials, like existing hard-disk recorders, but also simultaneously record two programs while playing back a third from its disk. Ultimate TV can store about 35 hours of satellite-TV programming, and can access the Internet using Microsoft's WebTV or another service provider.

With Xbox, several aspects of Microsoft's technology and business plans are attracting attention. Besides fast processing chips, the device's 64 megabytes of memory are configured in a way that allows programmers to devote more power to rendering objects with lifelike textures. Its hard drive also makes it possible to store ready-made animated environments in a way never before possible, and to save complex game sequences and replays.

In "Munch's Oddysee," a prototype game to be demonstrated in Las Vegas, an odd cast of crustacean-like creatures move, swim and fight through a landscape that looks like the latest in three-dimensional animation. Oddworld Inhabitants Inc., the game's creator, says it worked for more than nine months on a PlayStation 2 game before junking those efforts when Microsoft agreed to fund development of four games. The decision, says Oddworld President Lorne Lanning, was driven less by money than the Xbox's technology and the possibility of using standard PC development tools to help program it.

By contrast, he says, PlayStation 2 developers have laboriously created their own techniques and routines to program that system, a situation Mr. Lanning compares to an author having to develop a new word-processing program to write a novel.

Microsoft tried and failed to get other companies to build the Xbox, later deciding to design the console itself and have it manufactured by Flextronics International Ltd. of Singapore. Robbie Bach, the Microsoft executive who calls himself "chief Xbox officer," now says the company's own brand name and resources were essential to get game developers and retailers to support the system.

Microsoft has 1,000 employees working on Xbox, and says 200 companies have agreed to make games for it. The company plans to spend $500 million on marketing the machines during their first 18 months on the market.

"We wouldn't support Xbox if we didn't think Microsoft had the potential to sell upwards of 20 million or 30 million units," says Brian Farrell, chief executive of THQ Inc., a large game maker in Calabasas Hills, Calif., that is supporting both Xbox and PlayStation 2.

Video-game developers sometimes grouse about having to pay royalties in advance to game-machine companies, and about individually negotiated discounts and other arrangements. Microsoft says it is offering standard volume discounts for all companies, and doesn't demand payment until the disks are produced.

The biggest danger to Xbox would seem to come from manufacturing and supply problems, which were factors in Sony's inability this fall to meet its initial projection of shipping one million PlayStation units for its North American launch in October. Bach declines to give Microsoft's target for next fall, other than to say it is in the millions of units.

In the wake of Sony's stumble, Microsoft pushed back delivery of machines to Europe until the first quarter of 2002. Flextronics has arranged production lines in Mexico and Hungary, and Microsoft expects to have a parallel plant in Asia to serve Japan and nearby countries.

The real test, Flextronics' Bach says, won't be the first season of Xbox but how many machines and programs the company can sell in subsequent years, after the initial market of hard-core enthusiasts has been satisfied. "The thing that is going to determine success is the buzz about the games," he says.