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Originally published September 24, 2007 at 12:00 AM | Page modified September 24, 2007 at 2:07 AM

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Microsoft counting on "Halo 3"

Without "Halo," Microsoft's video-game business might not be where it is today, or might not be at all. "Ever since it launched, 'Halo'...

Seattle Times technology reporter

Without "Halo," Microsoft's video-game business might not be where it is today, or might not be at all.

"Ever since it launched, 'Halo' has been the flagship franchise for Xbox and Xbox Live," said Shane Kim, head of Microsoft Game Studios. "It released Day 1 when we launched the original Xbox, and a lot of people would say there wouldn't be an Xbox business without 'Halo,' and I firmly believe that."

The first two chapters of the game — or epic saga, depending on your own personal investment in battling the Covenant and the Flood — accounted for sales of 14.8 million units, putting "Halo" on the same list as such blockbuster franchises as "Mario Brothers," "Madden" and "Grand Theft Auto."

Microsoft raked in more than $125 million in opening-weekend sales when it launched "Halo 2" in November 2004, "the only quarter in which the Xbox business was profitable," said Matt Rosoff, analyst with Directions on Microsoft.

The third installment, "Halo 3," which (big secret) goes on sale at midnight, could be just what the company's Entertainment and Devices Division needs to — in the exhortation of the game — "finish the fight" to profitability.

Executives have pledged to bring the division into the black this fiscal year after pouring as much as $7 billion into it over the past seven-plus years, including a $749 million charge this summer to repair and extend warranties on the Xbox 360 console.

"I think they're really counting on 'Halo 3' to drive profitability for that business division this year," Rosoff said. "This is kind of a make-or-break season for them. "

"Halo 3" already has done good things for other companies that managed to associate themselves with the game. Earlier this month, Radio Shack saw its stock price jump 7.3 percent on news it would be selling the game and the console in some of its 4,500 stores nationwide.

Kim said Microsoft is banking on "Halo 3" to drive additional sales of the Xbox 360 console. The company has sold 11.6 million consoles as it nears the start of its third year on the market. In recent months, the Xbox has been outsold by the Nintendo Wii, which launched last year.

The dominant platform in the last generation was Sony's PlayStation 2, but the PlayStation 3 has been lagging thus far.

"This is a very critical holiday in the current console generation, and our aspiration as a company has always been to win this generation," Kim said.

"Crown jewel"

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Part of its strategy to do so is to offer content exclusive to the Xbox 360. " 'Halo' is the crown jewel of that strategy," Kim said.

He said about 2.5 million people are still playing "Halo 2" on the Xbox Live network — which saw a major uptick in membership when the game launched. The company knows that "a lot of those people are still playing on original Xboxes. I think a lot of people are waiting to upgrade until Sept. 25."

Retailers have told him they're expecting 30 percent of "Halo 3" buyers to purchase an Xbox 360 at the same time.

Just selling more Xbox 360s won't necessarily lead to profitability for the broader games business, Rosoff noted. In the typical video-games business model, companies tend to lose money on the consoles and turn a profit on the games.

"They have to walk a careful line," Rosoff said. "They want to sell a lot of consoles but not so many that it racks their losses up."

"Game-attach rate"

Microsoft already boasts a high "game-attach rate" of 6.3 games per Xbox 360 sold. Gaming accessories for the console have been a bright spot, too.

"Microsoft recently cut the price on its Xbox 360 hardware, which generated increased hardware sales in August," Anita Frazier, toys and video-games analyst with NPD Group, said in an e-mail. "This price cut, shortly followed by a game launch as big as 'Halo 3,' will continue to drive platform sales across hardware, software and accessories well into the holiday season, positioning the Xbox 360 and Microsoft to fare very well when final annual sales are tallied."

In addition to games and consoles, Microsoft makes money from Xbox Live subscriptions and sales of content that can be downloaded from the network.

With "Halo," it has extended the brand into other entertainment businesses such as graphic novels and comics, action figures and board games.

Microsoft said it expects the "Halo" franchise to generate sales of more than $1 billion by the end of this year — though it's not clear how much of that cash stays with Microsoft or its retail and licensing partners.

"It's a big number in the gaming business," Rosoff said. "Is it a big number for Microsoft [which had more than $51 billion in revenue last year]? Not particularly."

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

Copyright © 2007 The Seattle Times Company

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