MICROSOFT'S XBOX AS BROADBAND TROJAN HORSE

This week, millions of avid American game players are expected to trample over one another in an attempt to buy Microsoft's Xbox, the software giant's new gaming console that is key to Microsoft's broadband strategy. Microsoft has announced little about the Xbox other than plans to take the gaming experience online, but analysts said Microsoft's real plans are ambitious: make the Xbox the world's ultimate broadband appliance.

“There are a lot of people with the view that the Xbox will be a Trojan horse into the home,” said Cynthia Brumfield, president of Broadband Intelligence. “Once you get it into the home, you have a base from which to deliver a whole host of telecom services. [Microsoft] wants to be the ubiquitous provider of data services.”

The real potential of Xbox lies in its built-in Ethernet card and its internal hard drive, two features never before seen in a gaming console. By getting the Xbox into millions of homes worldwide, Microsoft can push services through the Xbox and a dedicated cable or DSL connection.

Online gaming will be the first offering, while content and services from MSN, Interactive TV and the whole family of Microsoft products are expected to follow, said Michael Goodman, senior analyst for The Yankee Group.

Sony's PlayStation 2, the Xbox's chief rival, has made headway in the broadband space. Earlier this year, Sony launched a PlayStation-centric ISP in Japan that provides an online gaming portal, tailored content and high-speed asymmetrical DSL connections. Sony also signed agreements with RealNetworks and Macromedia to bring multimedia capabilities to the PlayStation, and it recently inked a deal with AOL Time Warner to let the console function on AOL's proprietary network.

But much of Sony's efforts appear to be an afterthought, Goodman said. The PlayStation's Internet functionality depends on separately purchased peripherals — a separate Ethernet card still not available in the U.S. and an external hard drive.

On the other hand, Microsoft seemingly built the Xbox around the broadband concept. Its operating system is Windows-based, allowing it to easily incorporate multimedia and Internet software on the market. And Sony's ISP deals don't approach the breadth of Microsoft's partnering program, which includes DSL deals with all the Bell companies, agreements with cable partners AT&T Broadband and Charter Communications, and broadband deals with international service providers.

But Microsoft must get Xboxes into homes to take advantage of this broadband positioning, Goodman said.

“Right now Microsoft doesn't have a base to operate from,” he said. “They don't have the 27 million PlayStations to launch from [or an] army of Pokemon junkies to market to. But once they push the Xbox into millions of homes, they can build on that base to sell more services.”