Microsoft Plays Video Leapfrog

Its next version of Xbox could be early to market. Will that give it a leg up on Sony?

For the past few years, Microsoft Corp. (MSFT ) has vowed not to give Sony Corp. (SNE ) a head start in the next generation of video game consoles. It's a lesson Microsoft learned the hard way. Sony's PlayStation 2 had a 20-month jump on Microsoft's Xbox, which launched in November, 2001, and rode that lead to a 69% market share. Microsoft started work on the next version of Xbox right after the original shipped, to be ready when the next console cycle began. Said Microsoft's Xbox boss, Robert J. Bach, in a recent interview: "We'll be there when Sony is there."

Turns out he may have been underplaying his hand. BusinessWeek has learned that Microsoft is planning to launch the next version of Xbox, code-named Xenon, in time for the holiday season in 2005, shaving a year off the typical five-year console life cycle. And while a Sony partner says the Japanese company is aiming for the same launch window, game developers say Sony hasn't yet nailed down the key technical details of its next PlayStation. Without that data, developers can't begin coming up with games, which typically takes 18 months.

While Sony will not publicly discuss launch plans, developers believe PlayStation 3 will likely land on store shelves in Japan in the spring of 2006, and in North America six month later. If they're right, Xbox could hit the market as much as a year ahead of its biggest rival -- giving Microsoft a big advantage. Says David Cole, an analyst with researcher DFC Intelligence: "That could push Xbox into the lead."

The reason: Content is king in the game business, and hitting the shelves first would help Xbox bring out hot new games ahead of Sony and Nintendo Co., which says it will launch its next model when the new PlayStation comes out. PlayStation 2's early hits with such games as Gran Turismo 3: A-Spec and Grand Theft Auto 3, launched while Microsoft and Nintendo were finishing their consoles, put those rivals in a hole from which they've never emerged. That lead fed upon itself. Gamers bought PlayStation 2 because it had the best content, and developers made more games for it because it had the most users. If Microsoft can grab an early lead in the next round, it could displace Sony as gamers' top pick.

Microsoft is leaving little to chance. Eager to lure developers to Xbox, it is making it cheaper and easier for them to write games. Many once leery of working with the software giant now say they're eager to develop games for Xenon. "We can't believe this is Microsoft," says one.

For now, sony is a study in contrast. The company turned up the hype three years ago, announcing plans with IBM (IBM ) and Toshiba Corp. (TOSBF ) to create a low-cost chip to power the console, called Cell, that can run circles around today's supercomputers. But developers have since learned little about the new technology, making it tough to start creating games for the next PlayStation. "It's a big Achilles' heel for Sony," says Jack Sorenson, executive vice-president for worldwide studios at THQ Inc. (THQI ), the No. 2 independent video-game publisher. "They can't unload the specs on us and expect to have good games at launch." Sony spokeswoman Molly Smith will say only that PlayStation 3 will launch when ready, regardless of "competitive movement."

Sony execs believe the current PlayStation has plenty of life left and that there's no need to rush out a new console. The numbers say different. On Apr. 27, Sony reported that fiscal year revenues in the video game unit, which had been a bright spot in its recent lackluster results, fell 18%, to $7.5 billion. Sony estimates it will sell a third fewer PlayStation 2s in the current fiscal year.

It's far too early to project a winner in the next generation. But in this race, Microsoft may have a shot at lapping the competition even before the starter's gun is fired.

By Jay Greene in Seattle and Cliff Edwards in San Mateo, Calif.

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