A Gamer's Fantasy Come True
Arik Hesseldahl, 05.16.05, 7:00 PM ET
Video game geeks, your fantasy has come true.

One of the best-selling video games of all time, Final Fantasy, will be available for the first time on Microsoft's (nasdaq: MSFT - news - people ) Xbox. The company also confirmed that some of the top-selling current Xbox games will work with the forthcoming Xbox 360, due out later this year. Typically, customers are forced to spend an average of $50 on new video games every time a new hardware console comes out.

Securing Final Fantasy XI for the Xbox will be seen as a key victory for Microsoft's campaign to overtake rival Sony (nyse: SNE - news - people ) as the king of the hill in the video game console business. If nothing else, it should make the Xbox more attractive to potential buyers. That's because people buy the hardware based on the available games.

Other publishers developing Xbox games include Electronic Arts (nasdaq: ERTS - news - people ) which has committed to bring 25 titles to Xbox 360, including Madden NFL 06, Tiger Woods PGA Tour, NBA Live 06 and a game based on the Godfather films. Other titles coming for Xbox 360 include Call of Duty 2 and Quake 4 from Activision (nasdaq: ATVI - news - people ).

It's strong launch for Microsoft, which will have the field to itself when it launches the Xbox 360 in the U.S. later this year. The first Xbox was off to a slow start because of a lack of compelling games. Developers, after all, have limited resources and can't spend time and money writing games for a console that may or may not be successful.

Still, Microsoft is hoping that the Xbox will finally be the digital nerve center of the home. The stakes in the video game business have never been higher. Microsoft and Sony want to use video game consoles as a way to control the digital living room. Microsoft has optimized Xbox 360 for high-definition TV. It has a 20-gigabyte hard drive and can connect to a home network, using Wi-Fi to share video, audio and photos with PCs in the home. It also has a progressive-scan DVD player. Adding all this stuff is a way for the company to drive sales of adjacent software and services.

"Customers expect more [from a video game console] in the way of digital entertainment," says Robbie Bach, head of Microsoft's Xbox division. One possible scenario, for example, would be accessing its MSN online music store via the Xbox. "We

certainly haven't announced anything like that, but there's no technical reason that we couldn't do that," he says.

Sony will likely match the Xbox on at least some of the features, such as high-definition gaming and Wi-Fi capability. But Sony's famously decentralized corporate structure means that one division doesn't share technical information with another division, and there is no smooth way for different Sony systems to interact--the notable exception being the ubiquitous Sony memory stick.

Microsoft hasn't discussed pricing for the Xbox 360 but some analysts have suggested it may cost upwards of $400, $100 more than the original console. Microsoft has lost billions collectively subsidizing Xbox hardware since its introduction several years ago.

On top of hitting the market first, Microsoft appears to be winning the buzz battle with Sony. Nearly all of the talk about new video game systems has been focused on Microsoft. The company bought a 30-minute infomercial on MTV last week to promote the system. Chairman Bill Gates, along with an Xbox, was featured on the cover of Time magazine this week, which may be a response to the many covers of weekly newsmagazines that Apple (nyse: AAPL - news - people ) and its products have garnered.

Sony, by comparison, has had almost no leaks about its forthcoming PlayStation 3, and the first details were to be revealed later today at an event at the E3 conference in Los Angeles.

"To the best of my knowledge, Sony's next system isn't close to as well-baked as Microsoft's," says Mike Goodman, analyst at The Yankee Group. He suspects that Sony may show the design of its PlayStation 3 but it's not expected to discuss release dates, titles or prices. "I would be shocked if we saw games. Sony only shipped game development kits to software companies six months ago," says Goodman.

Goodman expects Sony to launch the PlayStation 3 in Japan in the late spring or early summer of 2006, giving Microsoft as many as six months to push Xbox 360 without competition. But Goodman says he expects Sony to remain the dominant player in the industry, though its market share lead will likely be diminished.

Staying in second place may sit well with Microsoft however. It has proven that it has patience (and cash) to weather huge losses to succeed in markets it considers strategic. "Having Microsoft's bankroll allows you to take a long-term vision that other companies can't," Goodman says.