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Microsoft Still a Long Way From Home

Ever since Microsoft (MSFT - Get Report) became a player in the video-game business, the game console has been portrayed as a Trojan horse built to take charge of the digital home.

But despite the hype surrounding the Tuesday launch of Microsoft's Xbox 360, the video-game console isn't yet ready to become the centerpiece of the high-tech living room.

"Everything is ultimately going to converge," says Mark Demos, an analyst for Fifth Third Asset Management, which holds Microsoft shares. That would mean -- eventually -- a single system to run all technology in the home: video games, the Internet, music and software applications.

But "we're not there yet," adds Demos, who predicts such convergence will arrive in five to 10 years.

( TheStreet.com also looked this week at how Microsoft's rivals will cope with the ballyhooed rollout; and what the new games and new game machines mean for investors. )

The Xbox 360 does take some concrete steps toward that realization. "One of the big things we started thinking about in planning in 2003 was making sure that Xbox 360 was going to be a console that played well with other devices," explains David Reid, director of platform marketing for Xbox.

To that end, Xbox 360 has three high-speed USB ports to connect to a variety of digital music players and cameras. And, of course, like the first-generation console, Xbox 360 can play DVDs. But you still need to connect Xbox 360 to a special Media Center PC to make it a more powerful hub complete with live TV, photo albums and movies on demand.

But even Microsoft's new-fangled console can't overcome external obstacles that continue to exist. For example, some people simply don't want to surf the Internet or send email from their TV in the living room because it's not private, notes James Lin, managing partner of video game consultancy Simba Group.

Moreover, the Internet hasn't developed enough to fully reach convergence, says Chris Bonavico, a portfolio manager with Delaware Investments, which holds Microsoft shares. "We're just starting to see the trend of downloading one show at a time," he notes. "It's a very long-tailed trend toward computing involvement in television entertainment."

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