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Contributors: Douglas McIntyre Jon C. Ogg

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Saturday, September 30, 2006

Weekend Edition: XBox Profit

"Microsoft Debut Should Make Xbox Profitable Net-Net in 2007"

Master Chief is....Peter Jackson?

At the X06 conference in Barcelona, Spain the Xbox team showed many developments, all of which are going to be good for gamers AND items which should turn Microsoft's Xbox franchise into a net-net profit center for Microsoft (MSFT). To date the Xbox unit has been a net money-loser for the company. I have said that the street acronym of Microsoft as "Mister Softie" should be changed to "Master Chief," and that is even more true after looking over today's news and reviews for the Xbox franchise at the X06 conference.

"Lord of the Rings" mega-film series creator Peter Jackson has teamed with Microsoft to launch a development studio and collaborate on a new "Halo" game.

Jackson is also producing a big screen "Halo" movie. He and Microsoft to create Wingnut Interactive to focus exclusively on video games, and its first untitled game will be set in the "Halo" universe. Wingnut will work with Bungie Studios, which created the franchise and is currently working on "Halo 3." Halo 3 is set for release next year, and as a big personal fan of the game franchise hopefully this one won't be delayed like the company's Vista operating system.

Besides Halo 3, Wingnut is supposed create another game that will focus on attracting non-gamers to gaming. Microsoft-owned Ensemble Studios also revealed it has been working on a game set in that universe: "Halo Wars," which is said to be a real-time strategy game for the Xbox 360.

The announcements came Wednesday at Microsoft's annual X06 event, held in Barcelona, Spain. There is no word of financial terms and it is not disclosed if Microsoft will invest in Jackson's company. Microsoft said the Xbox360 peripheral player will go on sale in the U.S. in mid-November for $199.99, and it will come with a HD-DVD version of Jackson's film "King Kong." This is a corporate strategy geared directly to mess with Sony and even Nintendo as they release their new consoles. Xbox 360 has more than 5 million units sold and the company said it is on track to sell 10 million by the end of the year.

Sony's PlayStation 3 launches in November, but the street is criticising it as late and not as good. The PS2's market share was roughly 70 percent of the global console market, and with the launch of Nintendo's new Wii around the same time and with the Xbox360 price cut and some exclusives it is being questioned about the prospects of Sony maintaining such an outright dominance.

Part of the key to Sony's success has been having exclusive deals with game makers such as Take Two Interactive (TTWO), but that is not the case this go-round. Microsoft today announced Take Two will offer Xbox 360 players of "GTA 4" two exclusive, downloadable episodic add-ons within months of the game's release. Take Two confirmed the upcoming title "Bioshock," which wowed critics earlier this year at E3, would be console-exclusive to the 360.

id Software and Microsoft announced a downloadable Doom title for the Xbox Live Marketplace that is actually a port of Ultimate Doom, including that game's fourth episode, "Thy Flesh Consumed."

This downloading of games is something we will have to monitor and something we have to monitor VERY closely for the investing community that trades video game stocks and the peripherals around it. If studios can start selling downloads direct, it could have major implications for retailers such as GameStop (GME), Best Buy (BBY), and even (AMZN). That is not to mean it is a threat yet, but it is something the retailers need to strike with publishers. These games would be nothing if it was not for the sales efforts of the retailing chains that depend on these sales, so you would think the retailers would secure their future with game publishers. I personally have a strategy for the stores to fight this if the publishers try to go around them, but this is still a ways out.

Electronic Arts (ERTS) has showcased the following for Xbox360: FIFA 07, Need for Speed(TM) Carbon, Tiger Woods PGA TOURĀ® 07, NBA LIVE 07, NHL(TM)07, Half Life 2 and SUPERMAN RETURNS(TM): THE VIDEOGAME.

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