Microsoft invests big to put Xbox online

Even as it is slashing the price of its Xbox video game console, Microsoft is planning to invest millions to develop an online service, dubbed Xbox Live, that will link the consoles and allow for online gaming.

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A Microsoft representative said the company plans to spend $40 to $50 per Xbox to create the interactive network. Some analysts have estimated that 10 percent of Xbox users will sign up in the early life of the network. Microsoft expects to sell 3.5 million to 4 million Xbox units for its 2002 fiscal year, which ends June 30.

Xbox Live will be a subscription service. Similar to the pricing plans for cable TV, Microsoft will offer a basic service for one price along with higher-priced premium services. Microsoft will unveil pricing and further details of Xbox Live at a press conference late Monday.

While it could attract users, the online strategy also increases financial risk for Microsoft. The company already loses about $120 on each Xbox it sells, making up the difference on software titles. Sony and other console makers also sell their consoles for less than the actual manufacturing price, with the intent of profiting off software.

Last week, Microsoft cut the U.S. price on the Xbox to $199 from $299, a day after Sony made a similar price cut to its PlayStation 2. Nintendo dropped the price of its GameCube by $50 on Monday, bringing the price to $149.

Once a quaint peculiarity of the Internet, online gaming is becoming big business. Sony's "EverQuest" is one of the biggest successes yet, with hundreds of thousands of subscribers paying $13 a month to access the game's virtual world.

Market researcher IDC predicts that total U.S. revenue from online gaming will increase almost 50 percent annually over the next few years, from $210 million last year to $1.8 billion in 2005.

Jupiter Media Metrix predicts similar growth, with U.S. revenue projected to hit $2.55 billion in 2006. Advertising revenue will continue to account for about 30 percent of the market, Jupiter predicts, with the bulk of revenue coming from subscriptions.

Microsoft announced Thursday that it has signed an exclusive publishing deal with Sigil Games Online, a development studio run by two of the creators of "EverQuest."

The field is expected to get much more crowded this year with the release of online games geared toward more mainstream audiences, including an online version of Electronic Arts' smash PC game "The Sims" and Sony's "Star Wars Galaxies," both of which will be previewed at this week's Electronic Entertainment Expo trade show.

Microsoft has several subscription-based games on its Zone gaming site, including the role-playing game "Asheron's Call."

News.com's David Becker and Michael Kanellos contributed to this report.