One such meeting happened this week, as Microsoft played host to representatives from companies such as Thomson Consumer Electronics and Toshiba--as well as game developers and other PC firms--at the company's headquarters in Redmond, Washington.
The topic of the talks? The "X-Box," a code name for an entertainment console that could rival similar products from Sony, Nintendo, and Panasonic, sources familiar with the meetings say. The new concept could be announced in time for the Consumer Electronics Show (CES) in January, sources added.
These new devices could pose a threat to the PC's dominance in the home, as companies build consoles that are capable of performing many of the functions of home computers, such as accessing the Internet. Even though it could potentially steal sales from the PC market, in which Microsoft is so entrenched, the X-Box wouldn't be a direct threat to the software giant, as it will be based on the company's own technology.
"It's still a rumor," said a Microsoft spokesperson, who declined to comment on plans for the X-Box. The spokesperson noted that he was not aware of any meetings between Microsoft and game developers.
Yet developers say they have been meeting with Microsoft executives in Redmond on the subject of a gaming device. An internal Microsoft Web site, part of the company's corporate intranet, already exists and is dedicated to the X-Box concept, one source who has been in contact with Microsoft said.
While Microsoft's console interest is real, the problem may lie in the firm's execution, analysts say. Game developers have to be sold on the new plan. Hardware makers also may be reluctant to sign on, as gaming consoles often incorporate expensive technology into relatively cheap boxes.
The X-Box would be based mostly on processors from Intel or AMD and high-powered graphics chips, and it would be Internet-ready, according to sources and various published reports. The box is believed to run a hybrid of Windows NT and Windows CE, according to Richard Doherty, president of The Envisioneering Group, although sources say the hybrid OS is more related to the scaled-down Windows CE for devices.
Despite Microsoft's silence, the firm's desires are slowly becoming more widely known. Microsoft's plans recently were made public by an executive of a Japanese software developer who was briefed by the company.
Clamoring for attention
Microsoft is eyeing the gaming market out of necessity, said Corey Wade, research director for video games at Alexander & Associates, a market research and consulting firm in New York. Revenue from the entertainment software industry now tops $7 billion a year--greater than the amount of money spent at the box office yearly on movies, he said.
Those numbers are coming primarily from the game console market, in which Sony has had tremendous success.
For these reasons, the game console market has steadily overwhelmed the PC for games, according to Kathleen Maher, editor in chief of The Peddie Report, a research publication devoted to graphics technologies.
"Game developers are migrating to the console platform because the numbers are so much better, even though the development costs are higher," she said.
That's bad news for Microsoft, and things could take a turn for the worse as Sony and Nintendo unveil their plans for next-generation game consoles.
Sony is farthest along in divulging plans for the successor to its popular and hugely profitable PlayStation. Aside from playing games with realistic 3D graphics, the device will play DVD movies and CD audio discs, and it eventually will be able to connect to the Internet. The device also could network with other gadgets, such as digital camcorders.
Plans still being formed
Although earlier speculation swirled that Microsoft might reveal its console ambitions this October, it is more likely that an announcement will happen in January, said one source familiar with the company's plans.
But industry sources say that Microsoft hasn't got its plan completely thought out. Part of the reasoning behind this week's briefing was to solicit ideas for a business plan. One idea considers the option of sharing revenues, similar to Sony's current strategy. That might help entice PC makers, which are otherwise reluctant to produce cheaper PCs that threaten to undermine sales of full-featured computers.
Another possibility is that Microsoft could pursue a manufacturing relationship similar to its WebTV partnerships, where it subsidizes the cost of the hardware but doesn't share any revenue. Maher thinks the X-Box may turn out to be a WebTV device "that happens to play games really, really well."
So far, it doesn't appear Microsoft has manufacturing partners lined up, sources say.
"I think they are still trying to guess what to do. But until Microsoft can talk about manufacturing partners, it's an incomplete story," one source said of the delay in Microsoft's announcement.
Maher thinks Microsoft may have brought in Rick Belluzzo from SGI to wrap up such details. With the MSN content group under his purview, Belluzzo would be in a position to meld new hardware platform strategies with Microsoft's content plays, analysts say.