Microsoft: Out of the X Box

How Bill Gates built his new game machine--and changed your living room forever

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They could very well lose it. Rumors surrounding the PlayStation 3's processor make it sound like the Ark of the Covenant wrought in silicon, and it may be much further along than Gates gives it credit for. "We look at delivering a quantum leap in technology, not just Xbox version 1.5," a Sony spokeswoman said recently. ("Kutaragi's good at rhetoric," Gates says of Sony PlayStation czar Ken Kutaragi.) For all the Xbox's underdog pluck, the PlayStation 2 still has an overwhelming hold on the $25 billion global video-game market: 68% at last count, to Microsoft's 17%; Nintendo has 15%, according to DFC Intelligence, a market-research firm. (See box, following page.) Microsoft doesn't come to the table with a handheld device like Sony's PSP or the Nintendo DS. It doesn't have the in-house multimedia expertise Sony has, or Nintendo's big-time kids' franchises like Mario and Pokémon. All three companies will be showing off their demos at this week's Electronic Entertainment Expo.

Even beyond the world of video games, Microsoft is looking a tiny bit peaked. You wouldn't want to say that it's vulnerable, but last quarter Microsoft missed its earnings estimates by a whisker. Open-source gadflies like Linux and Firefox are chipping away at its market share in small but irritating ways. Google is making scary noises and hiring away its talent. Apple is winning rave reviews for its new operating system Tiger, which incorporates features that Microsoft was planning for the next version of Windows--which won't be out till 2006. Microsoft isn't going out of business anytime soon, but if it were going to hit a home run, now would be a really great time to do it.

Give Gates credit. He and his company have correctly identified the fastest-growing segment of the entertainment industry in the world and hitched one of their many wagons to it. He's still willing to put down big bets when there's big action. And in this case Microsoft has managed to bind together cultural and technological trends in the same densely engineered overdetermined artifact. We tend to write off the past five years, the post-dotcom years, as a period of relative technological stagnation, especially when compared with the furious frenzy of Internet innovation that preceded it. But since 2000 we've experienced a massive, largely uncelebrated transformation. We've seen the rise of digital music. Digital cameras have become ubiquitous. HDTV is finally coming into its own. Broadband Internet access has become common, as has wi-fi--a coffee shop without a hot spot now feels positively Victorian. If 1995-2000 was the dotcom era, the dot-home era is now upon us. One way or the other, the Xbox 360 gets Microsoft a piece of all this.

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