Microsoft is set to make a splash tomorrow with the eagerly awaited unveiling of its new Xbox game console, eight years after the previous version, as it seeks a larger share of the US$65 billion a year global computer gaming industry.
But the device faces big competition from Sony's PlayStation 4 by Sony Corp and the Nintendo Wii U in a shifting market.
Gamers are gravitating to online play - suggesting the hey-day of console games are over - while Microsoft wants its sleek new toy to finally cross the bridge to the mainstream and become the family's entertainment center.
"Core gamers are very hungry for a new machine but the difference between 2005 and now is that the stakes are so much higher," said Ryan McCaffrey, executive editor at entertainment website IGN.com, harking back to Microsoft's last Xbox release. "The entire Xbox experiment from Microsoft was for it to be the centerpiece of your living room."
To that end, industry-watchers are expecting a raft of improvements in the new Xbox when Microsoft unveils it at its Redmond, Washington, headquarters tomorrow, from closer integration with the TV and link-ups with mobile devices to access to new and even exclusive content.
Console gaming still takes the lion's share of a growing gaming market - about 42 percent, according to Microsoft. But playing games on smartphones and tablets, or as an offshoot to online social networks, is gaining ground fast.
Console sales have been in decline for the past four years and the first of the new generation of machines has not reignited the sector.
The Wii U, launched in November, had sold only 3.45 million units by the end of March, well below the company's forecast of 5.5 million. Hopes for Sony's PS4 are low key.
"The next wave crest isn't as high as the previous one," said Lewis Ward, research manager at International Data Corp, who calculates that about 250 million Xbox 360, Sony PlayStation 3 and Nintendo Wii units were sold between 2005 and 2012.
"I do think that consoles as a product category have peaked and the next gen devices won't match those totals," he said.
The Xbox itself is not a key financial factor for the world's largest software maker. Its Entertainment & Devices unit is set to break US$10 billion in sales for the first time this year, but that's half the sales of its Windows unit, and a lot less profitable, averaging less than 15 percent margin compared to 60 percent or higher for Windows or Office.
The company has more than 46 million members who subscribe to its online gaming and digital entertainment service Xbox Live, but that's still a fraction of the people who pay for its software.
However, the Xbox is still a key weapon in Microsoft's strategic battle with Google, Apple, Amazon.com and others for a central place in consumers' lives.
"This is of massive importance to Microsoft. It is a piece of a larger war for the consumer that it is battling. They want to be fully integrated with the consumer whether it's in the living room or mobile," said P.J. McNealy, CEO and founder of Digital World Research. "Arguably the battle against both Apple and Google for dominating a consumer's time share more so than taking on Sony and Nintendo directly."
That means Microsoft will be aiming for many markets at the same time, from the core and casual gamer to the TV watcher and music fan.
To do that, industry watchers expect Microsoft to integrate the new Xbox more closely to the TV, perhaps allowing users to change channel or buy movies with a wave of the hand through its motion-control Kinect sensor.
