PETER MOORE has his hands full these days. As Microsoft's vice president of interactive entertainment, Moore oversees the Redmond software giant's games initiatives for both the PC and the highly competitive video game console market. Microsoft's latest entry into the console wars, Xbox 360, has now been on the market for a year, but this holiday season it has been joined by the latest offerings from its two competitors: Sony's PlayStation 3 and Nintendo's Wii.

When the first Xbox launched in 2000, Microsoft was the new kid on the block with much to prove. The Xbox never made money, but with its deep pockets, Microsoft essentially bought its way into the marketplace, selling a respectable 15.7 million units in North America and 24.6 million worldwide. Having a hit title real ease with "Halo" also helped the Xbox gain traction. But it was a distant second place to the industry leader, PlayStation 2, which according to research firm NPD has sold about 30 million units in the U.S. and nearly 110 million units worldwide. Nevertheless Microsoft was positioned for the next wave.

Xbox 360 marks Microsoft's coming of age in the video game marketplace. The newbie is now well established. Released a year ahead of its competitors, the two versions of the Xbox 360 sold 5 million units by June 30, the end of Microsoft's fiscal year, and the company projects selling 10 million by the end of the holiday season. The company doesn't break out the revenue from console sales, but with 80 percent of buyers choosing the higher-end $400 box (with a 20 gigabyte hard drive) over the basic $300 model, 10 million units translates into $3.8 billion in revenue. If Xbox was Microsoft's entry into a market dominated by others, Xbox 360 shows Microsoft is in the gaming market to stay.  

But the box itself isn't a profitable undertaking. Rather, it's in the sale of games, peripherals, downloadable content and other add-ons where Microsoft sees the money. "We don't exactly make a lot of money on the hardware. It's a classic razors-and-blades business," says Moore.

The online tie-ins of Xbox 360 gaming may be the key. There are now 4 million subscribers to Xbox Live, Microsoft's online gaming and community center, which the company launched four years ago. If half of those subscribers paid the $50 annual rate for the premium version, which allows multiplayer gaming over the Internet (again, Microsoft won't disclose the exact number), that's still another $100 million in the bank. And then there is the Xbox Live Marketplace, where Microsoft has taken the lead position in offering downloadable content, everything from casual games like "Uno" and "Texas Hold 'Em," to extra maps and goodies for existing Xbox games like "Halo 2," to music videos and movie trailers from studios eager to reach the coveted 18-34 demographic. Microsoft took the next logical step in late November, offering downloads of TV shows and full-length movies straight to the Xbox 360, another move designed to keep ahead of the competition. All of this can be purchased through the company's in-house micropayment system, which, because it doesn't require credit cards, is ideal for bringing in younger customers.

And online is where competitors Sony and Nintendo have lagged. Both of them are better-established in the games field, but they are only now launching, or soon to launch, their own online initiatives, and Microsoft has had a four-year run with Xbox Live to build traction among its consumers.

THE NET EFFECT OF THE NET
The question remains: How much of an impact will Microsoft's online head start have on the overall console war?

"All things being equal - PS3 and the 360 - a better online service will be a major advantage," says Alexis Madrigal, a video game analyst with DFC Intelligence in San Diego. But the two consoles aren't equal, he says, and there are many other variables at play. While both are powerful, the PlayStation 3 uses a newer, more powerful microprocessor than the Xbox 360, and it ships with a built in high-definition DVD player. In order to get in front of the PS3 release, Microsoft has also started selling a high-definition DVD player as a $200 extra. Most significantly, Sony has a back catalog of games that dwarfs what's available for the Xbox 360. But it may be too early to pick a winner, especially with high definition still in its infancy. "Next holiday season we'll know more," Madrigal says.

All these extras don't come free, however. "Right now, Microsoft's biggest advantage is price," Madrigal says. Compared with the $300-$400 range for the Xbox 360, the PlayStation 3 will go for $500 and $600. Meanwhile, Nintendo's Wii, while less powerful than the other two, is priced at a reasonable $250 and boasts an impressive back catalog; names like "Zelda" and "Mario" resonate deeply among young gamers.

The three companies diverge in where the video game box fits within their overall corporate strategies. Sony is banking that high definition DVD and its own Blu-Ray standard will be the must-haves, and the PS3 will become a media center. Nintendo seems to want to expand the market for games to the whole family, with its child-friendly fare and the innovative Wii controller, which players can wave around like a tennis racket or sword to interact with games.