A third model will join Microsoft's Xbox 360 lineup: the Xbox 360 Elite will feature a 120GB hard drive—six times larger than the drive on the standard console—and a High-Definition Multimedia Interface (HDMI) port and connecting cable, and it will be black instead of the standard console's gray. The Elite will capitalize on the strong demand for downloadable high-definition video content on the Xbox Live Marketplace. It will also keep pressure on competitor Sony, whose PlayStation 3 (PS3) natively supports more types of high-definition video content, but is selling slowly, primarily because of its high price tag.

Video Taking Off

Since its launch in Nov. 2005, the Xbox 360 console has become popular as a general home entertainment device: according to Microsoft, Xbox 360 users spend 40% of their time on the console using nongaming functions, such as watching DVDs or high-definition DVDs in the HD DVD format (with the aid of an HD DVD player peripheral), listening to CDs or digital music files, or streaming material from a Media Center PC.

In Dec. 2006, Microsoft began offering downloadable video to customers in the United States through the Xbox Live Marketplace. Response was stronger than the company anticipated, leading to long download times and requiring the company to upgrade the infrastructure for the service. Since then, Microsoft says, downloads have increased 400% (although it has not revealed the actual number of downloads), making Xbox Live the number-two source of downloadable video content after Apple's iTunes store. The Marketplace is currently the only online distributor for high-definition TV shows and movies, and demand has been strong: 47% of movies and 40% of TV shows downloaded through the service have been high-definition.

Elite Launches in April

The Xbox 360 Elite will capitalize on Xbox 360 users' demonstrated interest in high-definition video content. The Elite's 120GB hard drive will allow users to store more high-definition content, particularly TV programs (movies downloaded through the Marketplace are offered on a rental basis and must be played within 14 days of downloading and completed within 24 hours of beginning playback). The HDMI connection is required by many HDTVs to play back high-definition video from external sources. Previously, the Xbox 360 was available only with component HD or VGA connectors. For customers who've already purchased a console, Microsoft will sell the hard drive on a stand-alone basis for US$180, along with a migration cable to allow users to transfer data from their existing hard drive to the new one. (It is not technically possible to add HDMI connectivity to the existing Xbox 360 consoles.)

The Elite will be available in North America on Apr. 29 for a suggested retail price of US$480. Because Xbox Live TV and movie downloads are currently available only in the United States, Microsoft is launching the Elite in North America first. However, the company is working with content owners to make video available in other regions and expects to launch the Elite in Europe later in 2007 at a price of 480 Euros/350 British pounds.

Microsoft will continue to offer the standard Xbox 360 (with 20GB hard drive) and Xbox 360 Core System (with no hard drive) at their current prices of US$400 and US$300, respectively. The company says that about 20% of the approximately 10 million Xbox 360s sold have been Core Systems; it expects the Elite to carve out a similar share, leaving the standard Xbox 360 with about 60% of sales.

The company also announced new content partnerships for the Marketplace, including A&E Networks and National Geographic. In addition, Warner Brothers will begin to offer some movie downloads through the service concurrent with their DVD release, and Paramount Pictures will begin to offer movies in high-definition.

Staying Ahead of PS3

By launching the Elite at a lower price than Sony's PS3, Microsoft not only dampens one of the PS3's main advantages—high-definition video support—but also bolsters downloads (as opposed to disc-based media) as a distribution channel for high-definition video.

The PS3, which launched in Nov. 2006 in Japan and North America and in Mar. 2007 in Europe, has a built-in Blu-ray drive (Blu-ray is Sony's high-definition DVD format, which competes with HD DVD) and HDMI connector. These features, particularly the Blu-ray drive, are the main reason why the PS3 is more expensive than its competitors—in the United States, it costs US$599 with a 60GB hard drive (a US$499 version with a 20GB drive was discontinued in April). So far, consumers are not finding the PS3's multimedia features to be worth the extra expense: the PS3 has sold only about one-half as many units as Nintendo's US$250 Wii, which launched around the same time and was the number-four-selling console in the United States in January and February (following Wii were Sony's seven-year-old PS2 at US$130 and Xbox 360, in that order).

Although Sony offers some high-definition movie trailers for download through the PlayStation Store, it has not revealed any plans to offer full-length movies or TV shows through that service. Presumably, Sony would prefer users to buy or rent Blu-ray discs, in hopes that this will help establish Blu-ray as the de facto format for high-definition video, leading to a significant long-term royalty stream for the company.

The Xbox 360 Elite is highlighted at www.xbox.com/en-US/.