Microsoft has announced a planned $500 million investment in marketing and advertising to help launch its XBox, the first major hardware project the company has ever attempted. The combination video games console and Internet access device will compete with Sega's Dreamcast, Sony's PlayStation2, and Nintendo's planned launch of its new box, now known as Dolphin.

Microsoft plans for the XBox to use Intel's Pentium III processor, a custom 3D graphics processor from Nvidia, 64MB of memory, an 8GB hard drive, a DVD drive and a high-speed Ethernet connection for Internet access. The box will tie into WebTV interactive television and Internet service and MSN, the Microsoft Internet portal sites. The XBox will take advantage of Microsoft's new Microsoft TV suite of software applications, which the company markets to cable and satellite TV providers to offer email, chat and Internet surfing to subscribers. The announced features for the XBox will make the console the most full-featured gaming platform on the market. Microsoft has also promoted the ease of development for games for the XBox, saying it will be much easier to write games for than the PlayStation2.

Online gaming is a heavily-requested feature for home users of the Internet, and Microsoft expects the XBox to be a major part of its strategy for tapping the home market. MS has been pouring money and effort into the combination of television and Internet, with investments in WebTV and Microsoft TV.

The $500 million is earmarked for a heavy marketing and advertising campaign for the first 18 months of the product, to build demand for its entry into the crowded $7 billion video games market. This will be the largest launch the company has ever done, which will be needed to compete against Sony and Sega, both of whom will have had their flagship products on the market for over a year by next fall, when the XBox is planned to launch. The company also expects to use some of the money to subsidize the hardware, keeping the consumer price competitive with the other boxes available. Microsoft expects to make its profits from the software and publishing.

Microsoft has 30 new video games in development for the XBox, and has already issued 1,000 development kits to more than 200 third-party games developers for new games as well. Microsoft is becoming a serious player in the games market, shipping 20-25 games a year. Microsoft will also collect royalties from third-party games developed for the XBox.

Sony has planned an October 26 launch for its PlayStation2, the update to its PlayStation, which has sold over 70 million units. The company has stalled sales of the original PlayStation while the new box is readied for release, keeping supplies short or out of stock with major retailers. The new box will contain a DVD player and advanced graphics, and the company expects to ship 3 million units in the first six months of the life of the product. Sony has indicated that it seeks to add Internet access to the PlayStation2 as well, although details of how that will be enabled are sketchy at this point. Early adopters in the United States can expect to pay a premium for the new box as retailers are setting the price at approximately $330 for the new box.

Nintendo is expected to show off its new Dolphin console at the August Space World 2000 show. Sega appears to be looking at Internet access to save their floundering sales, and expects to launch SegaNet, its own Internet Service Provider in September. The company plans to refund the $200 Dreamcast price to SegaNet subscribers. Sega has lost over a billion dollars in the video games market in the last few years, and analysts say that the Internet play is a last-ditch attempt to provide a much-needed boost to the sagging company.

Market analysts have pointed out that Microsoft's planned subsidy of the hardware for the XBox may give the new system a boost in the market. If the company is able to put the XBox and associated software on the street for a rock-bottom price, it will help attract buyers reluctant to invest heavily in games consoles, which are typically non-upgradable. Microsoft appears to be targeting Sony as the competitor to beat, claiming the XBox will have three times the performance of the PlayStation2.

Microsoft's chief executive Steve Ballmer is enthusiastic about the launch. "We see a lot of opportunity, not just in the first generation of XBox but in driving the range of businesses and services that will bring us more deeply into the home market than we have ever been before. Ten years from now you may not be able to tell the difference between a TV set-top box and a games console. But at the moment all we are concerned about is developing the best games console in the business."