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Microsoft's Mission Implausible

"It seems like Play Station 3 will launch in June and that will be the end of Xbox," says Jane Snorek, a senior analyst who covers technology at U.S. Bancorp Asset Management. However, "I don't really think it will affect the stock price [of Microsoft] much. That's not why you buy Microsoft." Her firm's $30 billion in equities is underweight Microsoft.

While Snorek is one of the more pessimistic observers, others believe some impatient Sony fans may give in and buy an Xbox 360 while they wait for Play Station 3.

"[Microsoft] has a good shot at pulling even," says P.J. McNealy, an analyst who covers video games for American Technology Research. "Part of it is it's coming out earlier. It would be a different scenario if they were both launching this holiday."

It's the Software, Stupid

Despite the attention on the consoles, the real money in the video game business is in software. A popular analogy is the razor blade business, in which manufacturers lose money on their razors but then make money on the refills. Of course, refills are still tied to the number of total razors sold.

Microsoft makes the most money on games developed in-house, but also draws royalties from games developed by third parties such as Electronic Arts (ERTS) and Activision (ATVI - Get Report).

Microsoft is launching Xbox 360 with many more third-party titles than it had with the original Xbox. While some argue there's no blockbuster like Halo 2 in the starting line-up, others say that the 18 titles should be enough to appease gamers.

And in another sign of strength, Microsoft is gaining more support from Japanese game developers, a huge weak spot for the original Xbox that contributed to its flopping in that crucial market.

But there are splinters of weakness, says Simba Group's Lin, who noted that Korean PC game developer NCSoft is expanding its focus to other next-generation consoles but not the Xbox 360.
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