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Originally published July 15, 2008 at 12:00 AM | Page modified July 15, 2008 at 9:11 AM

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Xbox 360: your new fun source

As video games become the dominant entertainment category, Microsoft wants to be the life of every party. The company is equipping its nearly...

Seattle Times technology reporter

LOS ANGELES — As video games become the dominant entertainment category, Microsoft wants to be the life of every party.

The company is equipping its nearly 3-year-old Xbox 360 console with a major software update, content partnerships and a raft of new games that defy the stereotype of the bleary-eyed teenage gamer blasting away in a darkened basement.

During a 90-minute media blitz here Monday, Microsoft and video-game company executives described Xbox 360 entertainment options, including:

• Playing along to Bob Dylan's "Tangled up in Blue."

• Watching a movie stacked up in your Netflix queue.

• Hosting a virtual party with friends, depicted on-screen as personalized "avatars."

• Competing in a virtual episode of the game show "1 vs. 100" with thousands of others.

• And, of course, plenty of good old-fashioned gruesome first-person-shooter combat.

The array of entertainment choices reflects Microsoft's effort to deliver a single device that will appeal to both "hard-core" gamers and an emerging mass market.

Don Mattrick, senior vice president of Microsoft's Interactive Entertainment business, said that's the fundamental question facing the games industry today.

"Can we deliver to our fiercely loyal fans and at the same time continue to transform the industry by delivering to everyone?" Mattrick said before an audience of about 1,200 people at the E3 Media and Business Summit. "The answer is yes."

At stake is global spending on video games that could hit $48 billion this year, more than movie box-office receipts, music, and DVD sales, according to a PricewaterhouseCoopers forecast Mattrick cited.

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In 2007, the U.S. games industry was worth $17.9 billion, up 43 percent from a year earlier, according to the NPD Group.

"Games are now the leading driver of all entertainment spending," Mattrick said.

So far, the industry seems unfazed by the worries rippling through other corners of the economy. John Schappert, an industry veteran who, like Mattrick, joined Microsoft's games business a year ago, said entertainment has held up well during past economic downturns.

"People need entertainment. They want to have fun," Schappert said in an interview.

Microsoft's 7-year foray into console video games is only now starting to return a consistent profit.

After billions of accumulated losses since the company first introduced the original Xbox in 2001, Microsoft's Entertainment and Devices Division has delivered operating income of $614 million through the first nine months of fiscal 2007.

The company reports its fiscal 2008 earnings Thursday.

But the business plays an important strategic role beyond its financial impact.

"The games business is the cornerstone of Microsoft's home and entertainment strategy," said Matt Rosoff, analyst at Directions on Microsoft. "Microsoft wants to turn consumers into as big and well-developed a market as they have with big companies."

To continue growing, Microsoft has to expand the appeal of the Xbox 360, said Billy Pidgeon, games-industry analyst with IDC. "The hard-core enthusiast gamers who are going to buy a console have their Xbox 360," Pidgeon said.

Microsoft faces stiff competition as it tries to win a bigger slice of the mass market. The Nintendo Wii, with its simple, motion-sensing Wii Remote controller, has helped ease new demographics into console games.

Rather than battling the Wii with a motion-sensing controller of its own, Microsoft is pursuing the masses through an expanding variety of "social gaming" and content options.

Toward that end, Microsoft announced an exclusive deal with Netflix, the DVD-by-mail video-rental service that has branched out into on-demand video.

People who already subscribe to Netflix and pay $50-a-year for a premium membership in Microsoft's Xbox Live online network will be able to stream 10,000 titles to their televisions via Xbox 360 beginning in late fall.

The company said it has more than 12 million Xbox Live subscribers and has generated more than $1 billion in revenue from the service in the past 2 1/2 years.

It also announced a deal with NBC Universal to distribute more on-demand video via its own Xbox Live Marketplace.

Schappert, the industry veteran heading Xbox Live software and services, boasted that the Xbox 360 now offers more on-demand video than any other device connected to the television.

He also described a major update to the Xbox Live software, coming later this year, designed to be easier to use, more interactive and more personal. Gamers will be able to create custom avatars that can appear in games and in virtual online parties, where people can chat, share photos, watch videos and play games with their friends.

Pidgeon said the software update and expanded content options could help Microsoft attract more people in each household to the Xbox 360.

Music games, in which players use controllers shaped like instruments, hitting buttons in sequence to the music, are a fast-growing genre that has found a mass-market audience. Musicians are taking notice.

Bob Dylan and AC/DC will each have a track on "Rock Band 2," a "Guitar Hero" rival that launches on the Xbox 360 in September and on the Sony PlayStation 3 later in the year.

R.E.M. is set to release over Xbox Live a package of three songs from their new album for "Guitar Hero World Tour," said Kai Huang of Red Octane, the game's creator.

Metallica, too, is releasing its full-length album, "Death Magnetic," as downloadable content for two "Guitar Hero" titles at the same time as the album is released — a first in the industry, Huang said.

Microsoft, too, is getting into the act directly with "Lips," a title it's publishing exclusively, that turns the Xbox 360 into a karaoke machine, using songs from a personal music collection, using wireless, motion-sensing microphones.

Despite all of this, Microsoft hasn't lost sight of the hard-core audience. There were plenty of deeply immersive, violent and complex games on display Monday, including "Gears of War 2," an exclusive Xbox 360 title.

And in something of an industry coup, Microsoft has secured the next installment in the super popular "Final Fantasy" series for its platform. It was previously an exclusive for Sony's PlayStation 3.

Microsoft's executives also aimed their trash talk at the PS3, the biggest competition at the hard-core end of the spectrum.

Mattrick declared, "Xbox 360 will sell more consoles worldwide this generation than PlayStation 3."

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Copyright © 2008 The Seattle Times Company

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