XboxNext rumors continue

In an early February interview with the French financial newspaper Les Echos,
Gates said the next iteration of the Xbox may enable users to do video and photo
editing and surf the Web. Gates’ comments have led analysts to speculate about
what exactly the next version of the Xbox will be like, despite the fact that a release
is at least two years away.

According to Gamesindustry.biz, an online publication in the United Kingdom that
tracks the video-game industry, Microsoft is considering major upgrades to the current
console in the near future, which include integration of Internet Explorer and the Windows
Media streaming platform into the Xbox. The publication even speculates about the next
console’s name, referring to it as Xbox Next, based on recent domain name registrations
by Microsoft. Charlotte Stuyvenberg, communications director for the Xbox group, declined
to comment on the rumors. Stuyvenberg did, however, elaborate on Gates’ comments.

“The comments Mr. Gates made were made in the context of the new technologies the
company is looking at,” she said. “I think the console has the capability to do a lot of those
things and provides a lot of opportunities.” Stuyvenberg pointed to the Xbox’s powerful hard
drive and graphics technology, which current competitors Sony and Nintendo lack. Analysts
say the Xbox’s hard drive gives it the feel of a stripped down, hot rod PC, which makes it easy
to add digital media features.

Matt Rosoff, an analyst with Directions on Microsoft Inc., a Kirkland market research firm that
tracks Microsoft, said the next version of Xbox will most likely come chock full of digital media
capability. “I can see something that comes with digital video recording capability or is able to
store video and audio clips downloaded from the Internet or a PC,” Rosoff said. “Microsoft wants
Xbox to be a more diverse entertainment console.” He points to several reasons why digital media
and the Xbox could form a powerful duo.

For one thing, Microsoft already has an assortment of multimedia technologies in its arsenal. That
includes the Windows XP Media Center, a PC optimized for watching cable channels, DVDs, listening
to music downloads and CDs, managing digital photos and digital video recording. Rosoff also points
to the promotion of Will Pool, former head of the digital media group at Microsoft, to oversee the
company Windows desktop division.

Rosoff said it will be at least 2004 before a new version of Xbox comes out. Victor Raisys, an analyst
with Soundview Technology Group, is more conservative. He estimates the end of 2005 or early 2006
before the next Xbox console is released.”When they launched the initiative, Microsoft talked about a
five-year product cycle for Xbox,” Raisys said. Microsoft’s Stuyvenberg declined to provide a timetable
for the launch of the next Xbox console. Instead, Microsoft’s priorities remain promoting Xbox Live and
making more headway in the pursuit of exclusive game titles, the main driver behind mass adoption by
gamers, she said. Microsoft continues to look at acquisition opportunities, she said. Rumors of deals
with Sega and Vivendi swirled in recent weeks, but have died down.

Another problem Microsoft has only begun to contend with is the Xbox’s inability to catch on in Japan,
where only 860,000 units have sold to date, Raisys said. “The Japanese market is fairly important from the
perspective that a lot of game developers are based there,” Stuyvenberg acknowledged Microsoft’s troubles
in Japan. “It’s an extremely tough market,” she said. Microsoft recently hired Peter Moore, former president
of Japanese games-maker Sega of America, as vice president of Europe and Asia. In addition,

Raisys and Directions’ Rosoff both expect Microsoft and Sony to cut the price of their respective consoles from
the current $199 price to $149. A price cut may spur sales of the Xbox, Raisys said. Stuyvenberg declined to
comment on potential plans for a price cut.