Microsoft banks on online service to hook gamers (Reuters)

LOS ANGELES (Reuters) - Microsoft Corp. (Nasdaq: - ) is workingto lengthen its lead in not-yet-profitable online consolegaming to reel in new gamers and revenue as rivals just beginto lay out their plans to challenge the software giant.

Microsoft announced upgrades to its Liveconsole-connected online game service during this week'sElectronic Entertainment Expo in Los Angeles, including afeature that will allow players on its Xbox 360 console toshare games and messages between PCs and mobile telephones.

Xbox Live has 3 million subscribers who pay a $49.99 yearlyfee, and the company said that number would reach 6 million byMay 2007. The online service launched in 2002 and allows videogame players to compete against one another, exchange text andvoice messages and download new game levels and simple arcadetitles. Xbox Live quickly became the signature of the Xboxconsole, and is one of the key strengths of the Xbox 360.

Much of the downloadable content is sold for small fees,usually less than $11, and those transactions are expected tohelp drive revenue down the road.

However, even with a subscription fee and the revenue frommicro-transactions, the cost of building and maintaining anonline service makes it difficult to wring profit from it,according to a report by DFC Intelligence, which called mostsuch services loss leaders.

One expert said there's no question Microsoft loses moneyoperating Xbox Live, though that may change soon.

"We could potentially see 150 million next-generationunits," said analyst Van Baker of market research firm Gartner."If Microsoft gets 20 percent of that, and they're online gameusers, Live will become a revenue generator."

Electronic Arts Inc. (Nasdaq: - ) is the leading contentprovider on Xbox Live Marketplace, with 2.3 million downloadsin less than five months, the company said. However, theworld's biggest software publisher said last week that thecombined revenue from downloads, through its own sites and XboxLive, is a relatively small $10 million.

The financial benefit, said Activision Inc. (Nasdaq: - ) ChiefExecutive Robert Kotick, is definitely there, even though it istough to locate on an earnings report.

Eighty percent of gamers on current-generation consolessuch as the and Xbox play solo, Kotick said.

He thinks the next-generation of online-connected consoles,which include the Xbox 360, Sony Corp.'s (6758.T) PlayStation

3 and Nintendo Co. Ltd's (7974.OS) Wii, will bring in newplayers beyond the core male demographic.

"Ultimately, (Live) allows us to sell more games to a muchbroader audience," Kotick said.

http://us.rd.yahoo.com/