"We have to build demand for this to be successful," Robbie Bach, senior vice president of Microsoft's games division, said during a financial analysts' meeting at the company's headquarters today. "This will be the biggest launch ever done. You can see half a billion dollars (spent) in the first 18 months of the project."
The investment will include marketing, advertising and support to retailers and third-party software makers, Microsoft chief executive Steve Ballmer said.
Ballmer said the marketing costs also include Xbox subsidies. Game console makers routinely subsidize the cost of hardware, with consoles selling for about half the manufacturing cost. The difference is made up through software sales and licensing fees.
Microsoft's decision to create a gaming console, which includes a DVD drive and Internet access, is part of the company's broad strategy to move beyond the PC market.
The Xbox is the company's first major hardware project and will face stiff competition from Sony, Nintendo, Sega and other established game system makers, analysts said. For years, Microsoft has sold mice, keyboards, joysticks and other accessories, but never a full computing system.
Bach said the Xbox is on track to ship in the fall of next year. Microsoft is developing 30 video games in-house and is approving game projects from third-party software makers, he said. The company has finalized a design for the game console and has already shipped 1,000 developer kits to some 200 programmers who develop video games, he said.
"In terms of our success, the No. 1 key is great games" running on powerful hardware, said Bach, who said the Xbox will have three times the performance of Sony's PlayStation2.
As previously reported, the Xbox will use a Pentium III processor from Intel and a custom 3D graphics processor from Nvidia. It will have 64MB of memory, an 8GB hard drive, a DVD drive and an Ethernet connection for high-speed Internet access.
Microsoft, however, will face challenges in entering the market. By the time Xbox is released, PlayStation2 and Sega's Dreamcast, for example, will have been on the market for more than a year.
Bach added that Microsoft is not new to the gaming community, shipping on average 20 to 25 games a year for PCs.
"In the last four years, we've basically gone from not being in the games business to a serious player in the games market," he said. "To accelerate success, we have to be in more than just the PC market."
The Xbox is just one piece of Microsoft's plan to tap the market for devices that combine entertainment on television and the Internet--and one of four areas the company is investing in for the future. The company also is putting money into interactive television, wireless technology and its bCentral Web site, a Web portal offering the software and services small companies need to run their businesses.
Bach said Microsoft's gaming strategy fits well with its interactive TV strategy.
Xbox will tie into Microsoft's WebTV service, which consists of TV consoles and Internet access service sold to consumers, and into MSN, the company's consumer Web portal site.
"Online gaming could help drive the online environment in the home and integrates with MSN and WebTV as well," Bach said.
Microsoft's interactive TV strategy also includes the Microsoft TV software suite, a collection of Windows-based software sold directly to cable and satellite providers that lets them offer interactive services such as email, chat and Web surfing to subscribers. Cable operators AT&T, UPC in Europe and Rogers in Canada will soon test the technology in their networks.