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Game for Microsoft's New World?

Today marks the official end of the PC era and the start of the X era. Not X as in Xbox, but X as in X factor, the unknown. Even if you've never played a videogame and never will, a look under the hood of an Xbox 360 is a peek into your future.

The PC, that office automation machine that followed you home, is no longer the center of the universe. And the Xbox isn't just another gamer's toy. It's Microsoft's (MSFT) placeholder in your living room for a new genre of home gadget, one that hasn't yet been defined. Why do you think they called it Xbox?

READY TO EXPAND. True, the first Xbox was a hobbled PC disguised as a game console. Its standard jacks and ports had been chopped off to prevent buyers from doing more than playing games.

By contrast, the 360 is built to grow. It sports a USB jack and comes with an optional hard drive and wireless networking. It seems designed to be used in ways that haven't been thought of yet.

Hackers will probably have it running Linux by Friday, but what's more important is that Microsoft can ship software upgrades and sell add-on gear to let the Xbox surf the Net, watch cable TV or play your iTunes favorites -- activities for which you would currently need to park a Windows XP Media Center Edition 2005 PC in your living room.

INTEL NOT INSIDE. The most telling detail is one you'll only see if you take your 360 apart. The logo emblazoned on the CPU isn't Intel (INTC) or IBM (IBM). It says "Microsoft." The company licensed IBM's PowerPC design and already has a second chip manufacturer in Singapore cranking out Xbox CPUs.

Never mind how this changes the behind-the-scenes dynamics of chip suppliers. The more important effect is out in the open: Microsoft is the only brand you'll ever associate with the Xbox. There'll be no Intel Inside stickers on it, ever.

It's no secret why Microsoft wants to own, not share the turf. PC sales and profits have leveled off, while the "home and entertainment" market is taking off. But no one knows what the future of home entertainment will look like, any more than we would have been able to confidently predict the success of Amazon (AMZN), eBay (EBAY), Google (GOOG), and iTunes (AAPL) in 1993.

THE BIG PICTURE. Only one thing is sure: When millions of nontechies buy a $300 triple-core 3.2 GHz Windows machine with USB and Wi-Fi, one that pumps out HDTV and looks like a cross between an iPod and a DVD player -- and when they set it up in the living room instead of the home office, then new kinds of software and hardware will be invented for it. Whole new kinds of gadgets will be invented to compete against it, too.

I already have two gripes about the 360: I can't jack my TV cable directly into it, and I can't use it as a Wi-Fi base station to serve my laptops. Why not one box in my living room instead of three? Maybe Cisco (CSCO) will build it. Maybe Comcast's (CMCSA) name will be on it. Or maybe Microsoft will build out the Xbox.

The Xbox 360's immediate role is Playstation-killer, but its long-term goal is to break ground on a whole new playing field for which we haven't yet come up with a name. "Set-top box" won't do if you've got a flat panel instead of a set. "Game console" is almost an insult. Even "home entertainment" sells it short. My friend the corporate controller bought a 42-inch plasma display to forget about work, but then he realized what two million pixels could do for Excel. Now he plugs his laptop into the big screen to review 10,000-cell spreadsheets from the comfort of his couch.

WHOLE NEW GAME. All of this is great if you're the lucky consumer who gets to use it, but what if your company aims to sell this unnamed digital media platform? The glib armchair analysis is "Microsoft crushes all competitors." But with Xbox the company is disrupting its own core business, the Wintel PC, in favor of an all-Microsoft platform that locks out former partners like Intel and Dell (DELL). The result will be confusion, change, and opportunities -- whether you're Sony (SNE) or the 12-person company that makes the Squeezebox.

The only sure bet is the home box of the future will do a lot more than play games. Wherever Microsoft doesn't get it right, someone else will.


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