Microsoft Looks to `Halo 3' to Hold Xbox Console Lead

Sept. 25 (Bloomberg) -- Microsoft Corp. took the lead in video-game players after it introduced the Xbox 360 in November 2005, five years after entering the business. Now the world's largest software maker is banking on another new product to stay No. 1.

With Nintendo Co.'s Wii threatening to topple the Xbox by year-end, Microsoft is looking to ``Halo 3,'' the latest version of the best-selling Xbox series, to rekindle interest in its console. ``Halo 3,'' an alien-blasting game aimed at teens and young adults, goes on sale today.

``It's going to be close,'' Microsoft Chief Financial Officer Chris Liddell said in an interview.

Redmond, Washington-based Microsoft grabbed the lead in the latest generation of game consoles by selling its Xbox 360 a year before rival machines. A year later, Nintendo introduced the Wii, which surprised executives and analysts with its family appeal.

Wii has outsold the Xbox in the U.S. in each of the 10 months it has been on the market, according to Port Washington, New York-based researcher NPD Group Inc. Through June 30, Microsoft said it sold more than 11.6 million Xbox 360s, short of its initial forecast of 15 million. Nintendo said it sold 9.3 million of its Wii players.

Microsoft says it has big hopes for ``Halo 3,'' which sells for $59 to $129. The game may surpass the $170 million in one- day U.S. sales of the final installment of the Harry Potter books to make ``Halo 3'' the biggest entertainment event this year, said Jeff Bell, vice president for Xbox marketing.

New Players

```Halo 3' is going to bring a lot of people out of the woodwork,'' said Michael Pachter, a Wedbush Morgan Securities analyst in Los Angeles.

At stake is more than bragging rights. Microsoft has pledged to turn a profit in the Xbox division in the year that began in July, following $7 billion in losses since the first Xbox was sold in 2001. The Xbox division accounted for 12 percent of Microsoft's $51.1 billion in sales last year.

For the business to make money, Microsoft has to sell enough profitable software to make up for the machines, which often lose money or break even. Popular software can in turn boost sales of the consoles.

More than 10,000 stores stayed open until midnight to sell ``Halo 3,'' 54 percent more than for the second installment, which brought in $125 million on its first day, Microsoft said.

Game Disks

The release was marred by reports on blogs and gamer discussion groups such as GameTrailers.com that the limited edition packaging is scratching game discs. Microsoft responded by posting a notice on the Xbox Web site offering replacements.

As many as 6 million copies may be sold in the holiday season, compared with 6.5 million total for ``Halo 2'' since its November 2004 debut, Pachter said. At least 480,000 people have already played ``Halo 3'' online, according to the Web site of Bungie, the Microsoft studio that makes the game.

``Halo 3'' may persuade 5 million people to buy an Xbox, for a total of as many as 16.6 million, he said. That still won't be enough to keep Xbox 360 in first place, he said. He estimates that Nintendo will sell 19 million Wii's by year-end.

Ken Toyoda, a spokesman at Kyoto, Japan-based Nintendo, declined to comment.

Special Edition

Microsoft is offering a special edition machine in the green and gold colors of Master Chief, the humankind-defending soldier in ``Halo 3.'' At $400, it costs more than two Xbox models and less than the top-of-the-line version.

Microsoft shares have dropped 1 percent this year, compared with a 7 percent gain by the Standard & Poor's 500 Index. Microsoft rose 48 cents to $29.56 at 4 p.m. New York time in Nasdaq Stock Market trading.

Microsoft's first Xbox was thrashed by Sony Corp., whose PlayStation 2 outsold the Xbox 5-to-1. Peter Moore, an Xbox vice president at the time of the release of the second iteration, the 360, pledged a ``whole different ballgame.''

This generation has been different, but not in the way Moore envisioned. Nintendo, whose sales in the last series of game machines trailed Microsoft and Sony, is dominating.

The Wii's controller, which can be swung like a bat or a racket, gets kids more involved in the game and has been a hit with older players. Sony's PlayStation 3 was hurt by a higher price and a lack of appealing games.

Profit Margins

Microsoft is balancing its desire to keep the lead with its goal to turn a profit. ``Halo 2'' gave Microsoft Chief Executive Officer Steve Ballmer's entertainment unit its only profitable quarter. Games made in-house like ``Halo 3'' can have profit margins of as high as 70 percent, said Billy Pidgeon, an analyst at Framingham, Massachusetts-based researcher IDC.

``If they had chosen to lose $10 billion, they might be in first but that would be stupid,'' Pachter said. Ballmer ``is a disciplined guy and his troops are listening to his command: `Thou shalt be profitable.'''

Moore said last year Microsoft planned to sell 90 million Xbox 360s before this generation ends, up from 25 million with the first Xbox. To get there, Microsoft has to attract kids, women and older gamers.

Microsoft hasn't done that, Pachter said. ``Halo 3'' is targeted mostly at young males attracted by weapons such as a shoulder-fired laser cannon and a feature that lets them share their most impressive victories online.

The cheapest Xbox costs $280, too much to lure some customers even after an August price cut from $300. The Wii costs $250, with a game included. Most games cost $60.

More price cuts would jeopardize profit, so Microsoft may sacrifice the lead, Pachter said.