Halo's mission: save Microsoft's Xbox

Fri Sep 21, 2007 9:29am EDT

By Daisuke Wakabayashi

SEATTLE, Sept 20 (Reuters) - The mission of Master Chief, the protagonist in the popular "Halo" trilogy of video games, is to save humanity from an army of aliens.

If that's not enough to thrust upon one person, he's got another task: rescue Microsoft Corp's (MSFT.O) Xbox video game business from six years of losses and post its first-ever profit, and keep Wall Street off the backs of management.

"Halo 3" hits stores on Tuesday and Microsoft projects first-day sales of the game to eclipse the $125 million mark set by its predecessor, saying it will be the biggest opening for any entertainment product ever.

The last two "Halo" installments sold a combined 14.8 million units at more than $50 a game, turning the original Xbox into a must-have machine for many gamers and making the game extremely profitable.

This is a make-or-break year for the Xbox business. It has lost roughly $5 billion since Microsoft entered the video game console business in 2001 as a way to stem the rise of Sony Corp's (6758.T) PlayStation game console.

The Xbox 360, the successor to the original Xbox, made its debut about a year ahead of other next-generation game consoles, building a lead over Sony's PlayStation 3 and Nintendo Co Ltd's 7974.OS hugely popular Wii with an installed base of more than 11.6 million units.

"This is certainly a huge game for Microsoft in order to maintain the momentum with the Xbox 360 having the lead over Sony," said Alan Davis, analyst at D.A. Davidson & Co.

Anyone who wants to play "Halo 3," a futuristic shooter game featuring a space marine called Master Chief fighting an alien army called the Covenant, will have to buy an Xbox 360, since Microsoft makes the software only for its own machine.

Microsoft hopes that is just the incentive shoppers need ahead of the holiday season.

"We are in the stage of the console life cycle where content becomes king and people are going to buy the platform that has the games they want," Robbie Bach, president of Microsoft's entertainment and devices division, told investors at the company's analyst meeting in July.

"We feel like that (Halo) gives us a significant leg up and really will help drive the business."

Microsoft projects the entertainment and devices division, home to the Xbox video game console and loss-making Zune digital music player, to post a profit in the 2008 fiscal year ending in June after last year's $1.9 billion loss.

It expects segment revenue to increase between 10 percent and 19 percent this year from last year's $6.08 billion, 12 percent of Microsoft's total revenue of $51 billion.

WINDOW TO CONSUMERS

Like most console makers, Microsoft loses money on the sales of the Xbox 360 with the goal of making it back and then some over the life of the product with software sales.

It is a business model accepted by investors, but Microsoft introduced an unexpected loss in fiscal 2007 when it took a $1.06 billion charge to fix problems with the Xbox 360.

That loss strengthened the argument made by some investors who think Microsoft should stay out of consumer businesses such as the Zune and Xbox and focus on its profit-rich core software products such as its Windows operating system and Office suite.

Microsoft argues the Xbox and Zune are important in a world where people consume content in new and different ways.

The Xbox 360 is central to Microsoft's strategy of "connected entertainment," a vision of a world where people can consume the media they want any place, any time and on any device.

"The market is not a patient place and it's not very patient with Microsoft in this respect," said Morningstar analyst Toan Tran. "It's going to be an important milestone for the game division to finally turn a profit this year."

Since Microsoft officially entered the game business in November 2001 with the North American release of the Xbox, Microsoft shares have fallen 16 percent. During that period, the Nasdaq has risen 40 percent.

"Halo 3" is expected to play a big part in improving Microsoft's bottom line, because it is a "first party" title -- a game developed by Microsoft's own game maker not another publisher such as Electronic Arts Inc ERTS.O

Microsoft can make about $10 to $12 per game from "third party" titles, but "first party" games such as "Halo 3" and "Gears of War" -- a popular shooter game released by Microsoft last year -- can bring in several times that amount.

((Editing by Andre Grenon; Reuters Messaging: daisuke.wakabayashi.reuters.com@reuters.net +1 206 652 2326)) Keywords: MICROSOFT HALO/FINANCIALS

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