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"XBOX turning in its first profits creates plenty of confidence alright."

Not for me. If I was a stockholder, I would be very interested in Microsoft's business model for the Xbox2, and if it didn't satisfy me, I'd consider selling some stock. Microsoft is using its E&G division as a wedge to get into the home theater market, but I question the wisdom of using a console that's relied on two games--Halo and Halo 2--to make any marketplace ripples.

"Game consoles always make losses or low profits to start off with, until they get well established."

Yes and no. Nintendo has managed to make profits on every console it's sold since the NES. It's Sony who adopted the "lose money on hardware, gain money on software" model. The problem is that Microsoft hasn't even gained money on software sales except for this year, and the gain--in the face of Halo 2, the most pre-ordered game in history, which raked in more money on its opening day than most movies do, and sold 6.5 million copies to date--is miniscule. I'm glad they've finally posted a profit, but if it took one of the best-selling titles in videogame history to do it, they have problems.

"With XBOX live now having 1.4 million users, a very adequate installed base, games flying off the shelves, and even more great games coming this year, the XBOX will just grow from strength to strength right into when XBOX 2 is released."

Xbox Live stagnated at 995,000 users for about a year, and it again took Halo 2 to bump the number of subscribers up. Meanwhile, depending on which report you look at, more people use the PS2's online capabilities.

"Besides Microsoft can afford it."

Tell that to their shareholders, who are getting increasingly nervous about the Xbox.

" With a record net income of a massive $3.40 Billion, Microsoft easily makes far more profits than Sony or Nintendo and can outlast them in any price war."

Except that we're talking about the gaming industry, and Microsoft's revenue does NOT come from the gaming industry. Brute forcing the Xbox into the market will not work.

I own an Xbox. I have four games for it: Halo 2, Soul Calibur II, Ninja Gaiden, and Halo. Meanwhile, I've owned my PS2 for about a year and have around 16 games for it, in a far wider variety of genres than the Xbox offers. The Xbox was Microsoft's foot in the door regarding the game industry: stop trumpeting it as a magical success. Xbox2 stands a chance of being a success: Xbox will go out in a year as a console that had some good hardware ideas, bridged the gap between PCs and consoles, but couldn't even trump a weakened Nintendo. Microsoft's proved it can at least stand the gaming industry--now it has to try to become a serious competitor in it.

Tecmo and Bungie can't save them forever.

You raised lots of good points here.

"Not for me. If I was a stockholder, I would be very interested in Microsoft's business model for the Xbox2, and if it didn't satisfy me"

This is the way I see it.
Microsoft biggest sources of revenue today are desktop Windows and Microsoft Office, with servers rapidly catching up
Trouble is, desktop Windows and Office are never really going to grow that fast any more. Microosft already has most of those markets and they are matur markets.
With revenues around $40 Billion, Microsoft needed to get into a big high growth business to be able to continue to grow well.
With the vid games business has worldwide is projected to have revenues of $56 Billion by 2008 (http://www.indystar.com/articles/4/209613-8534-223.html ),its the right business for Microsoft to be in.

#1, Microsoft is using an amended for of Windows for the XBOX, so they don't have to write a new OS for it.

#2 Microsoft is using a verion of Direct X from Windows for the graphics of the XBOX.

# 3, when Microsoft started with Windows , back in 1983 I think, it took nearly 7 years till 1990 before Windows really took off.
Microsoft made huge losses developing Windows all those years, with little or no sales.

#4, point 3 also applies to Microsoft Word and Excel. In fact Microsoft had to do an entire re-write of excel.
Today both Windows and office generate huge revenues and profits.

#5, Microsoft already caused Sega to leave the console business.
I think Nintendo may be forced to concentrate on their hand held consoles sooner or later, or be marginalized in the desktop console business, leaving the spoils to Microsoft and Sony, whose market shares and profits will go up accordingly.

#6, I think XBOX Live is going to be big and provide a source of recurrent revenue for Microsoft.

# 7, when XBOX 2 comes out (probably late this year), its going to be a much closer fight with Sony's PS2 whenever that comes out.
Expect XBOX 2 to get into the black much sooner than this current XBOX.

Compared to Windows, Windows NT and other current big revenue Microsoft products, the XBOX has made a profit remarkably quickly and can only grow from strength to strength.
It was always better for Microsoft to use its huge profits and cash reserves to take losses and enter into a high growth business, than just sit back and count the money and watch their growth slow to nothing.