Microsoft banks on online service to hook gamers

LOS ANGELES - Microsoft Corp. is working to lengthen its lead in not-yet-profitable online console gaming to reel in new gamers and revenue as rivals just begin to lay out their plans to challenge the software giant.

Microsoft announced upgrades to its Live console-connected online game service during this week's Electronic Entertainment Expo in Los Angeles, including a feature that will allow players on its Xbox 360 console to share games and messages between PCs and mobile telephones.

Xbox Live has 3 million subscribers who pay a $49.99 yearly fee, and the company said that number would reach 6 million by May 2007. The online service launched in 2002 and allows video game players to compete against one another, exchange text and voice messages and download new game levels and simple arcade titles. Xbox Live quickly became the signature of the Xbox console, and is one of the key strengths of the Xbox 360.

Much of the downloadable content is sold for small fees, usually less than $11, and those transactions are expected to help drive revenue down the road.

However, even with a subscription fee and the revenue from micro-transactions, the cost of building and maintaining an online service makes it difficult to wring profit from it, according to a report by DFC Intelligence, which called most such services loss leaders.

One expert said there's no question Microsoft loses money operating Xbox Live, though that may change soon.

"We could potentially see 150 million next-generation units," said analyst Van Baker of market research firm Gartner. "If Microsoft gets 20 percent of that, and they're online game users, Live will become a revenue generator."

Electronic Arts Inc. is the leading content provider on Xbox Live Marketplace, with 2.3 million downloads in less than five months, the company said. However, the world's biggest software publisher said last week that the combined revenue from downloads, through its own sites and Xbox Live, is a relatively small $10 million.

The financial benefit, said Activision Inc. Chief Executive Robert Kotick, is definitely there, even though it is tough to locate on an earnings report.

Eighty percent of gamers on current-generation consoles such as the and Xbox play solo, Kotick said.

He thinks the next-generation of online-connected consoles, which include the Xbox 360, Sony Corp (NYSE: - ).'s PlayStation

3 and Nintendo Co. Ltd's Wii, will bring in new players beyond the core male demographic.

"Ultimately, (Live) allows us to sell more games to a much broader audience," Kotick said.

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