Part 1: Will Microsoft lose the living room? In August, at the European Computer Trade Show in London, Microsoft reportedly gave private demonstrations of a hybrid game console and DVD player -- code-named X-box -- running its Windows CE operating system. While Microsoft has not confirmed the reports, Yates admits the software giant's WebTV subsidiary has the ability to make an X-box device. "We definitely have the technology internally in software and hardware to develop such a device," he said. Moreover, Sony's weakest piece -- connecting the living room to the Internet -- is where Microsoft is strong. Through its WebTV Internet TV service, Microsoft has already driven 800,000 TV-centric consumers online. Cooperation between EchoStar and Microsoft will result in a WebTV-enabled satellite receiver that can also pause programming up to 30 minutes (shades of TiVo and Replay Networks), thanks to a very PC-ish hard drive. And deals with cable providers have made a special version of Windows CE a viable set-top box operating system and Windows NT servers a key component of several cable services' two-way digital backbones. Plus, every month, Microsoft strengthens its vision. Last Thursday, the software giant announced a new PC-based product to bring Internet into the home. Called the MSN Web Companion, the device will be a cheap way to drive consumers onto Microsoft's Internet service. Yet, having all the pieces and figuring out the consumer jigsaw puzzle are two different things, and Microsoft is running out of time. Already, hybrid consumer appliances bringing Internet access or games or both are in the works. For example, consumer electronics giant Toshiba has announced support for the relatively unknown VM Labs and its DVD-Internet-game player, Nuon. Matsushita Electric Industrial, known to US users through its Panasonic product line, has placed its bet on game console maker Nintendo. The two companies' combination game-DVD-Internet devices are due to hit shelves in the fall of 2000. And, as if there weren't enough competition, last Thursday, set-top box maker Scientific Atlanta announced a deal with ICTV to put allow users of their Explorer 2000 cable set-top box to play arcade games over the company's high-speed cable connection. Such devices will account for 12.3 million units in sales their first year on the shelves, according to a report by games market analyst Fairfield Research That's far higher than the less than one million WebTV boxes that have been sold to date, and the few million DVD players that will be sold this year. That business model is the "why" behind Microsoft's push for Windows CE game development on Dreamcast. Games drive consumers to new hardware faster than any other platform. "DVD took 3 years to reach a million units -- we've sold half a million in two weeks," said Charles Bellfield, director of marketing at Sega. And Sony's original PlayStation has sold more than 23 million units in the four years since its US launch. That phenomenal sales rate has games makers concentrating far more on games for the living room than the den. In 1998, two-thirds of entertainment software revenues came from console systems rather than the PC. Microsoft has pushed development on consoles as well -- more than 75 titles are being developed for Windows CE on the Sega platform. That exodus will continue, said Forrester analyst Schwartz. "The PC market is being cannibalised by (the success of consoles)," he said. "PC games have a finite future -- living room-based entertainment is wide open." And Microsoft has just begun to stake its claim. Part 1: Will Microsoft lose the living room?