Microsoft Throws Its Hat Into Consumer Electronics Ring

Microsoft (MSFT Quote) is jumping into the dogfight for the lucrative home entertainment market with its soon-to-be-released Xbox video game console. The company will begin to bare its fangs Saturday when Chairman Bill Gates unveils the super-charged video box at the Consumer Electronics Show in Las Vegas.

Gates will give the first live demonstration of the Xbox, scheduled to be released in the fall. Until now, company watchers have been skeptical that the software giant would release the product on time because it's notorious for launching new technologies late.

"The demo is a good sign indicating that Microsoft is proceeding with their plan to get this to retailers on time," says Felicia Kantor, an analyst at Lehman Brothers, which hasn't done recent underwriting for the company.

Microsoft also plans to announce the February release of a satellite-based interactive-television service offered in partnership with DirecTV, owned by Hughes Electronics (GMH Quote). Among other things, Ultimate TV can record two programs while playing back a third from its disk. It also has to capability to store about 35 hours of satellite-TV programming and can access the Internet. The pending product introductions were first reported by The Wall Street Journal.

The two products are keys to Microsoft's need to move beyond a PC-based business. Unlike traditional consoles, the so-called "next generation" Xbox runs on PC processors and a hard drive. Microsoft says this more sophisticated technology creates faster, more detailed graphics. And users also will be able to access the Internet and play DVDs with the box. It also will have the capability to interact with PCs, transferring software and other programs.

The Xbox is so significant to Microsoft's future strategy, that the company has set aside a half-billion dollars to market the product. About 1,000 employees are currently working on the product, and 200 companies, including top video gamemaker Electronic Arts (ERTS Quote), have signed on to provide games for the hardware, according to Microsoft.

"Good games are crucial to the success of the console. Sega's Dreamcast never became nearly as popular as it could have, because it had no major game publisher supporting it," says Kantor.

The Xbox is expected to challenge Sony's (SNE Quote) recently released PlayStation 2 for home entertainment dominance. Though PlayStation 2 has had delivery and parts problems, analysts expect that it will be the market's No. 1 or No. 2 console. PlayStation 2 already has Electronic Arts games like Madden NFL and DVD capabilities.

"Microsoft will certainly try to unseat Sony as the leader, but it's still too early to tell who will win," added Kantor.