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Sunday, November 20, 2005

Get Ready for the Xbox Shootout

Get Ready for the Xbox Shootout

"Microsoft's console launch gives it "a shot at unseating Sony" at No. 1, says S&P's Jonathan Rudy. In software, he likes Electronic Arts

Free Image Hosting at www.ImageShack.usGamers are gearing up for the launch of Microsoft's Xbox on Nov. 22, just in time for the important holiday season. Leading console maker Sony is behind this time -- it will release its PlayStation 3 in the spring of 2006.

"It should be a very exciting cycle," says Jonathan Rudy, who follows software stocks for Standard & Poor's Equity Research. "It will be interesting to see how it plays out technology-wise -- whether PlayStation can hold the lead this cycle, or whether Microsoft will win out."

ALL ABOUT BUZZ. With the addition of new multimedia functions, like playing video games over the Internet against other players, Rudy thinks hard-core gamers will be out in force buying the new consoles (see BW Online, 11/18/05, "Slide Show: Xbox Game Titles").

Karyn McCormack of BusinessWeek Online spoke with Rudy on Nov. 16 about the group and his favorite stocks. Edited excerpts of their conversation follow:

Note: Jonathan Rudy is a Standard & Poor's Equity Research analyst. He has no ownership interest in or affiliation with any of the companies on which he writes research. All of the views expressed here accurately reflect the analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed here.

What does the new Xbox console mean for Microsoft? I've heard a few money managers cite that as a reason to be bullish on the stock.
It's definitely generating a lot of buzz for Microsoft. People are excited about the whole brand of the Xbox. Revenue-wise, last fiscal year, its whole home and entertainment division was about 8% of revenues. So for a company like Microsoft, which is running at roughly $40 billion in annual revenue, it's not so much the initial impact.

They've come from out of nowhere essentially a cycle ago, to becoming a solid No. 2, to having the first-mover advantage in this cycle. That was a huge advantage for Sony's PlayStation 2 last cycle, as far as getting the economies of scale and building out the installed base to generate the buzz and excitement.

That's where Xbox 360 has beaten PlayStation 3 to the punch this year. So it will be really interesting to see whether Microsoft is able to leverage that advantage into a No. 1 position this cycle [see BW Online, 10/25/05, "Inside IBM's Xbox Chip"].

It's difficult to really weigh exactly what it will mean in pure dollars this fiscal year, vs. down the line, where once you build out the installed base and become the No. 1 or a close No. 2 player, you deal with a huge installed base. Then you can sell a bunch of software into that installed base. " [more]

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