Xbox makes a pre-emptive strike against PlayStation in console battle

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May 16 could have been just any other third Monday in May, but Sony and Microsoft chose to make it showdown day. Within hours of each other, the No. 1 and No. 2 video-game console makers were supposed to give a first glimpse of the next generation PlayStation and Xbox in Los Angeles, one day before the annual E3 industry bash.

But then Microsoft trumped Sony. The Seattle software giant announced it had teamed up with MTV to air a special half-hour show May 12 titled "MTV Presents: The Next Generation Xbox Revealed" hosted by actor Elijah Wood.

Some may view this as just another salvo in the video gaming war that's been going on since the days of Sega and Nintendo. Only gamers really care, right? Wrong.

Microsoft's break with the industry tradition of unveiling products at E3 foreshadows a much bigger break from traditional video gaming, a $11 billion industry.

The new boxes are true entertainment platforms. They can connect to the Internet for e-mailing, Web surfing and downloading music. They display in high definition, play DVDs, store pictures and catalog music libraries. Although further details are still pending, there is potential to record movies, make Internet phone calls and even record TV programming like TiVo does. Marketers will be able to reach casual and hard-core video gamers in dynamic, interactive ways not possible before. (See story, below.)

"It could change the landscape quite a bit," said David Cole, president of DFC Intelligence. "But the most immediate battle will be smaller and mostly about video gaming."

For Sony, the PlayStation brand is one of its last bastions of cool innovation, as well as one of its last reliable profit centers after several difficult years of intense market competition. Since its October 2000 launch through 2004, Sony sold 81.4 million PlayStation 2 consoles. While the March-launched PlayStation Portable is doing very well, it needs the PlayStation 3 to be another hit to back up both consumer perception and financial gains.

For Microsoft, Xbox has been its biggest and most successful foray into consumer electronics gear, and has lent the brand credibility as solid hardware makers, game developers and online entertainment experts. It needs Xbox 360 (its reportedly leaked name) to prove the first box wasn't just a fluke if it wants to keep building Xbox into a consumer entertainment platform. And it does.

DIGITAL HOME

"You can argue the digital home is a factor here as well as Microsoft's image. It's an attractive idea that game consoles can morph into and be marketed as entertainment devices," said Brian O'Rourke, analyst with In-Stat. "That's been established, although it's still a niche application."

Microsoft Chairman Bill Gates is confident. He's been telling reporters that Xbox 1 was a learning experience in which Microsoft let it be second. Since its November 2001 launch through the end of 2004, Microsoft sold 19.1 million. He has predicted the Xbox Xenon (the new device's code name) will overtake the leadership position Sony has long enjoyed.

Sony, on the other hand, has been extremely quiet. Some attribute its hesitation to fear of repeating mistakes; when PlayStation 2 launched, Sony talked up deals and advanced capabilities like Web browsing (with America Online), streaming media (Real Player) and episodic content.

Also Xbox 360 is expected to ship before the end of the year, while PlayStation 3 isn't likely to come out at least until early 2006. Sony can afford to sit back and wait to see what the competition will deliver first.

Advertising and marketing campaigns for the next-generation boxes will likely reflect both the initial gamer target and the broader consumer entertainment goals. Sony and Microsoft's rivalry appears to have even spilled over a bit into their agency relationships. Interpublic Group of Cos.' McCann Erickson just last week moved responsibility for the Xbox account from its New York to its San Francisco office, and hired three executives from Omnicom Group's TBWA/Chiat/Day, San Francisco, the agency that handles the Sony's PlayStation 2 console business. (Read more: AdAge.com QwikFIND aaq53u.)

"It's certain all the players involved will spend hundreds of millions of dollars on marketing which will initially be aimed at the core gamer, but will spread to a wider audience," said Jupiter Research analyst Michael Gartenberg. "It's a huge play by Microsoft to go to MTV, bypassing the industry and going right to the consumer with their message. It will be interesting to see if Microsoft tries to further redefine the rules of engagement."

There's a wild card here too. No one is counting out No. 3 player Nintendo in next generation advances. Nintendo is expected to at least talk about, and possibly unveil, its next generation box (code-named Revolution) at an invite-only press event on May 17, the day after the Sony and Microsoft events.

"I have no doubt that Nintendo does not intend to sit out the next generation of consoles," Mr. Gartenberg said.

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