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Microsoft Still a Long Way From Home

But that hasn't stopped Microsoft from adding new features to its online-gaming platform, Xbox Live, to move closer toward the single-device ideal. Among them: a new marketplace for online commerce and the ability to handle micropayments for features that gamers can build onto their games.

To date, however, online gaming has attracted a small audience. Xbox Live counts only 2 million subscribers, or about 10% of total Xbox owners. Although Xbox Live is widely viewed as a more powerful platform than rival Sony's (SNE) online gaming effort for Play Station, Sony's has far more users, with 2.5 million registered in North America alone.

While the larger number of Play Stations sold partially explains this difference, there's another key difference between Microsoft and Sony's online strategy: Microsoft has been charging $49.99 for an annual subscription to Xbox Live while Sony has offered its online platform for free.

"Certainly what we found in our research is that cost was a huge barrier to entry," says Molly Smith, senior director of brand development and communication for Sony Computer Entertainment America.

Microsoft apparently came to the same conclusion, as it's adding a free "silver" tier of Xbox Live to the $49.99 gold membership, which offers additional content and the multiplayer online gaming.

It's still a subject of debate, however, whether online gaming will move beyond a niche market that attracts only hard-core gamers. Wedbush Morgan analyst Michael Pachter argues that playing video games is primarily a solitary activity, like other forms of entertainment, such as reading a book and watching TV.

"You don't want to interact with other people -- we do that all day long," Pachter argues. "Microsoft is wrong: Everybody doesn't want to be online all the time."

But David Riley, senior marketing manager for NPD Group, disagrees. A recent NPD survey of gamers found that they're spending more time playing online compared with last year, and they're more willing to pay for online play. In particular, NPD highlighted an increase in woman and teens playing Xbox Live.

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