To build and maintain consumer interest in Xbox through the crucial 2003 holiday season, Microsoft has introduced a wireless networking adapter and a discounted bundle with two games and is adding new functionality to the Xbox Live online gaming service. Yet, even as it focuses on the upcoming holiday season, Microsoft has begun planning for the next version of the console by signing a deal with graphics chipmaker ATI.

Third Holiday Season

The 2003 holiday season is very important to the success of Xbox. Generally, game consoles have a five-year life cycle, with hardware sales leveling off in the third year and software sales continuing to build through year four. Xbox was introduced in North America—its most successful market—in Nov. 2001, making this its third holiday season. Microsoft expects to sell between 5.1 million and 6.6 million Xbox consoles in fiscal year 2004 (which began June 30, 2003), compared with 5.5 million in the previous fiscal year.

Adding to the pressure, Sony announced in May 2003 that it would release an updated version of PlayStation 2 in 2004. Sony’s PSX will include built-in networking capabilities and a hard drive (like Xbox) as well as a TV tuner and rewritable DVD drive (which Xbox lacks). Thus, 2003 could be the last holiday season in which the Xbox hardware will have a clear advantage over its most important competitor.

New Add-ons and Improvements

The following improvements and special deals are designed to build and maintain interest in Xbox:

Xbox Wireless Adapter. An 802.11g wireless adapter will connect consoles to local wireless networks. This solves a common problem for Xbox Live users: connecting the Xbox to a broadband modem that is often in a different room. The adapter can also be useful for console-to-console gaming with System Link–certified Xbox games.

The adapter was announced in conjunction with a new line of 802.11g wireless home-networking hardware from Microsoft, but it will work with network hardware from third parties such as Linksys and Netgear. Networks based on 802.11g offer a top data transfer speed of 54Mbps, and typical rates are between 30Mbps and 35Mbps, which is fast enough for real-time game play. The new adapter will also allow Xbox users to connect to slower 802.11b networks, and will come with software that allows users to configure the adapter from the Xbox, rather than from a PC.

The Xbox Wireless Adapter will be available in early October for a suggested retail price of US$139, or US$99 when customers buy an Xbox Live Starter Kit, which includes a one-year subscription to Xbox Live and a headset for voice communications.

Xbox holiday bundle. Microsoft is offering an Xbox, a two-month subscription to Xbox Live, and two Live-enabled games for a suggested retail price of US$180 in North America. The current suggested retail price of the console alone is US$200.

Online improvements. As promised earlier, Microsoft is slowly adding functionality to Xbox Live. A new Web site, accessible through www.xbox.com, allows users to enter their Gamertag ID to see which games their friends are playing, view statistics and scores from online games such as NFL Fever 2004 (part of Microsoft's new XSN Sports line-up), and see exclusive content. The company has also rolled out Live Now, an update to the Xbox Live dashboard, adding a buddy list that enables users to see which games their friends are playing and to launch voice chats without being in a game. (For more on these and other planned improvements, see "Xbox Expands Online Offerings" on page 30 of the June 2003 Update.)

ATI to Replace Nvidia in Next Console

The next version of the Xbox console will have a graphics chip supplied by ATI rather than Nvidia, which supplies graphics chips for the current Xbox but had disputes with Microsoft that led to legal arbitration.

According to various sources, Microsoft expected Nvidia to lower the price of the chips used in Xbox more quickly than it did, and a change to the Xbox's internal architecture in mid-2002 left Nvidia with an overstock of chips that it could not sell or reuse. ATI provides the Flipper graphics chip for Nintendo's GameCube, and its experience with the console industry could save it the problems Nvidia had.

Neither company said when the next version of Xbox would appear. Microsoft might release an updated version of Xbox in 2004 to compete with PSX—Microsoft Chief Software Architect Bill Gates and other executives have made presentations suggesting that a future version of Xbox could feature TV-oriented features, such as a digital video recorder. Otherwise, the next version will probably not appear until 2005 or later, when Sony is expected to release its PlayStation 3.