• Sidebar: Xbox Economics 101
• Illustration: Xbox Live Architecture and Technology
• Sidebar: Bill Gates on the Future of Xbox

Microsoft will launch Xbox Live, a virtual private network for playing Xbox games over the Internet, in autumn 2002. The company believes Xbox Live will help sell more Xbox games, increase the number of Xbox users, and present opportunities to sell related services, such as broadband Internet access and prepaid game cards. Competitors Sony and Nintendo are also taking steps to online-enable their consoles, but Microsoft believes its US$1 billion marketing and infrastructure investment will help it attract gamers and third-party manufacturers more quickly.

Features and Launch Plans

Microsoft unveiled details of Xbox Live at the Electronics Entertainment Expo (E3) trade show in May 2002.

The service will be open to any Xbox user with cable or DSL broadband Internet access (but not ISDN or satellite) and will support at least five multiplayer games at launch (four of which will be created by Microsoft Game Studios). Sixty other companies have also committed to making games for it. Microsoft expects 50 online titles to be available by the end of 2003, including an online version of Microsoft's "Halo" (the most popular game for the Xbox so far, with more than a million copies sold) and LucasArts' "Star Wars Galaxies" (which will also be online-enabled for Sony's PlayStation 2).

In addition to online multiplayer gaming, Xbox Live will have the following features:

Communicator, which will allow gamers to communicate via voice over the network during games. Communicator will include voice masking (players will be able to use pre-set voices included with each game), muting, and parental controls.

Matchmaking via QuickMatch, which allows a gamer to find an opponent with a single press of a button, and OptiMatch, which searches the network for gamers of similar abilities. These services will also attempt to match users from the same geographic vicinity to minimize latency (the lag time between when a user takes an action and opponents experience that action).

Gamertag, a unique user ID. Although it is based on Passport technology, Gamertag will not ask the user for any information, apart from an optional PIN number or password that gamers can use to prevent others from impersonating them on the network. Eventually, Passport users will be able to use their usernames and passwords as Gamertags, and vice-versa, but this will not be supported at launch.

Friends, a contact list that allows gamers to see when friends are online, figure out which game they are playing, and challenge them to a multiplayer match in that game or another game via an onscreen or voice message. (There are no plans to integrate Friends with the MSN Messenger instant messaging service.)

Downloads, such as updates to games, new levels, characters, and lists of statistics. Some of these downloads will be fee-based, allowing the game manufacturer to receive additional revenue beyond the initial sale of each game.

The service will launch in autumn 2002, following a consumer beta test involving 40,000 to 50,000 users scheduled for late summer.

Xbox Live will initially be sold as a US$50 starter kit that includes a one-year subscription, connectivity software, a microphone-headset kit for voice communication, and a free online racing game ("Re-Volt" by Akklaim). Microsoft has not set subscription prices for the second year and beyond, but Xbox Business Development Manager Michael Mott says it will probably cost less than US$10 a month. Microsoft will also work with partners and other divisions of the company (such as MSN Internet Access) to make promotional discounts and bundles available.

Microsoft will build four datacenters to support Xbox Live. One in Tukwila, WA (near Seattle), will handle non-gaming services, such as gamer identity and authentication, matchmaking, and billing; three others in London, Seattle, and Tokyo will contain downloads and game data for certain games.

(For more details on how the service will work, see the illustration "Xbox Live Architecture and Technology".)

Main Goal: Sell More Games

Microsoft is betting that online gaming will help overcome the economic disadvantages that Xbox faces, particularly its higher cost of manufacturing compared with Sony's PlayStation 2 (PS2) and Nintendo's GameCube. (For a detailed analysis of cost factors, see the sidebar "Xbox Economics 101".)

In particular, Microsoft is counting on Xbox Live to do the following:

Sell more games. Microsoft believes Xbox Live will help it sell more games, primarily by paving the way for more interesting titles. In addition, Xbox Live could help Microsoft and third-party manufacturers extend the life of certain titles with downloads. This goal is particularly important because, according to Microsoft's market research, most console users grow bored with their consoles after an average of 18 months, and buy no more titles after that time. By extending the lives of some titles, Microsoft hopes to keep users playing with their Xboxes for two or three years, thereby extending the window in which gamers will buy other titles.

Sell more Xboxes. The availability of interesting titles should encourage more people to buy Xboxes. A large number of users is crucial for attracting third-party game manufacturers, who tend to develop for the platform that can give them the biggest audience. Without third-party support, Xbox risks a "death spiral" in which gamers and manufacturers reinforce each other's indifference and sales quickly diminish.

Create cross-selling opportunities. Xbox Live presents opportunities for Microsoft and its partners to sell related products, particularly broadband Internet access, which has suffered from a lack of interesting applications. (For background, see "Broadband Crucial to Consumer Strategy" on page 17 of the May 2002 Update.) Microsoft will work with ISPs on co-marketing campaigns for Xbox Live, and to establish peering agreements, which will allow users accessing Xbox Live from certain ISPs to experience quicker connection times and less latency.

Xbox Live might also help retailers sell home networking equipment, prepaid game cards, and other peripherals.

In addition, Microsoft executives have talked about Xbox's role in other Web-based services. For example, Microsoft could sell a TV remote control peripheral for Xbox, then Xbox Live could add a fee-based service that allows users to download a week's worth of searchable TV listings to the console and change channels by scrolling through these listings. (See the sidebar "Bill Gates on the Future of Xbox".)

Generate revenue. Xbox Senior Vice President Robbie Bach has said that Microsoft hopes to have 10 million Xbox Live subscribers by 2007. At US$10 a month, that's US$1.2 billion per year—a respectable figure considering that Microsoft's entire Consumer Software, Services, and Devices business segment had revenues of US$1.95 billion in the fiscal year ending June 30, 2001. The ability to translate those revenues to profits, however, depends on whether Microsoft can keep the costs of the network down.

Sony, Nintendo Take Less Risky Approach

Microsoft was not the only console manufacturer to announce support for online gaming at E3. Beginning in Aug. 2002, Sony will offer a US$40 broadband adapter for PS2, and Nintendo will offer two US$35 GameCube adapters, one for broadband users and one for dial-up users.

The key difference is that neither Sony nor Nintendo plans to build any infrastructure for online gaming—at least not while the current generation of consoles is on the market. Instead, they will concentrate on reducing manufacturing costs, creating new offline games, and using investments or incentives to convince third parties to build exclusive games for their platforms.

Sony and Nintendo are taking this approach primarily because they believe there is limited demand for online console gaming. Also, their current consoles lack local storage, making many popular online gaming features (such as the ability to download updates) impossible.

In addition, some third-party game developers have expressed concern that Xbox Live will guide users toward Microsoft-created games, or will dilute the audience for their own online networks. Sony and Nintendo hope to capitalize on these fears by convincing these developers to build online games for their consoles first or exclusively. One gaming company, Electronic Arts, has already committed to building an online version of "Madden NFL" for PS2, but not for Xbox Live (the offline version is available for both consoles).

Despite these risks, Microsoft believes its approach will win out among both gamers and game developers for the following reasons:

Low cost to manufacturers. Without support from Sony and Nintendo, small game developers will bear all the costs of online-enabling their games for PS2 and GameCube, and they will have to solve problems such as establishing connections between consoles and allowing gamers to maintain consistent online identities. With Xbox Live, Microsoft will make a standard set of APIs available, allowing even the smallest game companies to get all the functionality of Xbox Live. (However, even on Xbox, manufacturers of "massively multiplayer" games such as "Star Wars Galaxies," which involve constantly changing virtual worlds and tens of thousands of simultaneous connections, will have to host the servers containing the games themselves—Microsoft will only provide the standard features of Xbox Live.)

Consistency. Microsoft will only certify games that use all Xbox Live features. As a result, gamers know what they'll be getting when they buy an Xbox Live game, including voice communication, a consistent online identity, and the ability to find opponents easily.

Security. Xbox Live is incorporating security protocols such as Internet Protocol Security (IPSec) and Kerberos. This will make it difficult for unauthorized outsiders to tap into the network to cheat at games or upload viruses or other malicious code to users' Xboxes. It will also reduce the likelihood that information about users (such as which game they are connected to at a given time) will be stolen as it travels the network.

Guaranteed titles. To spur demand and show third-party manufacturers that Microsoft is serious about Xbox Live, Microsoft Game Labs is aiming to create between 20% and 40% of all titles for the network, according to Xbox General Manager J Allard. Whether or not this goal is reached (it might be higher if third parties don't jump aboard), it nonetheless guarantees a sizable library of Xbox Live titles.