Xbox the spot for Microsoft

Microsoft developed the original Xbox console in about 18 months — a rush job, executives said, that didn't allow much second-guessing.

So when it came time to work on the next-generation console, code-named Xenon, the Xbox team nit-picked and analyzed every detail for three years. It asked the opinions of hundreds of consumer focus groups around the world. It hired dozens of consultants, seemingly sparing no expense.

"Everybody just had to run at full throttle to get the job done" with the first Xbox, said J Allard, a corporate vice president in the Xbox division. "With Xenon, what we were able to do is say, 'Ready, aim, aim, correct the aim, OK, ready, fire.' "

Microsoft unveiled the console, called Xbox 360, in a 30-minute program yesterday on cable music channel MTV.

The console brings Microsoft to a critical point in home entertainment. Up to now it has been a minor player in the living room, its console often a second choice for gamers that already have Sony's PlayStation 2.

Now, four years after entering the video-game arena, the company is making a run for the top spot — a position that would finally make it a powerful force in consumer electronics.

That effort begins with an intense marketing push that would continue beyond the console's November launch and could be as expansive as the $500 million campaign Microsoft created for the original Xbox console in 2001. The Xbox 360 will probably be the only next-generation system to hit the market before the holidays; Sony's PlayStation 3 and Nintendo's Revolution console are expected to go on sale next year.

Microsoft is hoping its early entrance helps tip the video-game market in its favor after getting trounced by Sony in the current-generation battle. Sony has shipped 87.5 million units of its PlayStation 2 consoles worldwide, compared with 19.9 million Xbox consoles and 18 million Nintendo GameCube systems.

Microsoft hasn't said how much the new console will cost. Analysts are expecting the machine to debut in the $300 range; the current Xbox sells for $150.

The Xbox 360 is white with green undertones, a color the company has named "chill," and has wireless controllers and just the whisper of a logo. It will operate horizontally or standing on one end, and has slightly concave sides.

Whereas the first Xbox was Microsoft's brash, in-your-face entrance into the video game industry, its successor is a more mature appeal beyond the hard-core gaming crowd.

Emphasis on ease

To emphasize that point, Microsoft said that a woman will bring the Xbox 360 on stage when it unveils the console next week at the Electronic Entertainment Expo (E3).

"We can't lose the way that we've spoken cool and aspirationally to our consumer, but at the same time we need to broaden," said Peter Moore, a corporate vice president in the Xbox division. "Otherwise we're going to end up with 30 million (consoles) in the next generation. And that's not good enough."

Exactly how to broaden was a large focus of the three-year planning period for the Xbox 360. To please its base of hardcore gamers, Microsoft gave the Xbox 360 a powerful engine. For nongamers, the company enabled the console to play DVDs and music. Users can also listen to music and view photos from music players and digital cameras plugged into the console's three USB ports.

Another focus for Microsoft was avoiding the mistakes the company made with the original Xbox.

The console's design didn't impress gamers in Japan, so it made a special effort to focus on that market. The Playstation 2 beat the original Xbox to retailers by a year, so Microsoft rushed to get its system out ahead of Sony's next-generation console.

Microsoft lost money producing the original Xbox systems, so it is working with new chipmakers and has restructured its contracts to keep costs down.

Those tough lessons have come at a significant cost to Microsoft — its home and entertainment division has lost about $1.2 billion a year since the original Xbox launched.

Executives are banking on the Xbox 360 to generate a profit, and have forecast the home and entertainment division will start making money by 2007.

Microsoft advantage

It would have been nearly impossible for a standalone video-game company to survive with that kind of loss. But Microsoft makes billions a year from its other businesses, allowing it room for that kind of huge investment.

If successful, it would gain the company a presence in living rooms and ensure that Sony doesn't usurp the personal computer's role as the gateway to the Internet, said Matt Rosoff, an analyst with Directions on Microsoft.

"I think they were prepared in going into this to invest significant amounts of money, on the order of billions of dollars, he said.

Microsoft has also heavily invested in building up its Xbox Live online service, and now has about one subscriber for every 14 consoles it has shipped.

The company is revamping the service for the Xbox 360, with plans to give all users free access to basic features such as voice and video chat and messaging. It plans to charge a subscription fee to those who want to play others online.

Seeking an audience

The company's goal is to get half of its Xbox 360 players connected to at least the free services in Xbox Live. From there, it can make money with advertising or through a micropayment system that lets players buy game levels or other virtual items for a small fee.

"There will only be so many people that want to play multiplayer online gaming," Moore said. "But the audience that wants to connect their Xbox 360 is an audience that we cannot turn our backs on. It's something that's very important to us."

Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com