The Xbox One, which will be available later this year at a price to be announced, will also be the first platform to release the next installment in Activision Blizzard Inc’s blockbuster shooter franchise, “Call of Duty”.

Microsoft hopes its third-generation console will attract video game fans who are increasingly sampling games on mobile devices, while also becoming a hub for living room entertainment.

The console took four years to develop and will launch worldwide “later this year,” games unit chief Don Mattrick told reporters at an event at the software company’s campus near Seattle, without providing details on timing or pricing.

The device’s launch came after months of intense speculation on industry blogs about what new features it might sport.

The new device interacts with a television, responds to voice and gesture commands, and includes Skype video calling, 15 exclusive game titles and original programming content.

The Xbox One will chiefly compete with Nintendo Co’s new Wii U and Sony Corp’s forthcoming PlayStation 4 for a bigger slice of the $65 billion-a-year computer game market.

LION’S SHARE

Console gaming still takes the lion’s share of a growing gaming market – about 42 percent of the $65 billion world market, according to Microsoft. But playing games on smartphones and tablets, or as an offshoot to online social networks, is gaining ground fast.

The world’s largest software company also sees the Xbox One as a broader strategic piece in the battle with Apple Inc, Google Inc and others to control consumer entertainment in the age of tablets and smartphones.

To that end, Microsoft presented the new box as more than just a video game console.

Acclaimed movie maker Steven Spielberg will be executive-producing a television series based on Microsoft’s blockbuster sci-fi game “Halo” for the Xbox One, the company said.

The new console will offer exclusive National Football League content and eight new game franchises, executives said.

Activision Blizzard Inc will launch “Call of Duty: Ghosts” later in 2013, first for the Xbox.

The device will have 8 gigabytes of memory, with an updated controller and new-generation Kinect sensor that communicates a user’s voice and gesture commands to the console. The technology is built on the Xbox operating system and the kernel of Windows software to handle Internet-based content.

Moreover, the device will let users store entertainment content, including movies, games and music, on cloud servers, the company said.

Despite its strong brand and ‘cool’ factor, the Xbox itself is not a key financial factor for the world’s largest software maker. Its Entertainment & Devices unit is set to break $10 billion in sales for the first time this year, but that’s half the sales of its Windows unit, and a lot less profitable, averaging less than 15 percent margin compared to 60 percent or higher for Windows or Office.

The company has more than 46 million members who subscribe to its online gaming and digital entertainment service Xbox Live, but that’s still a fraction of the people who pay for its software.

Microsoft’s stock was up slightly at $35.02 in afternoon trading on Nasdaq.

(Reporting by Bill Rigby; Editing by Gerald E. McCormick, Dan Grebler and Nick Zieminski)

But the small device faces some big competition from the PlayStation 4 by Sony Corp and the Wii U by Nintendo Co Ltd in a shifting market.

Gamers are gravitating to online play – suggesting the hey-day of console games are over – while Microsoft wants its sleek new toy to finally cross the bridge to the mainstream and become the family’s entertainment center.

“Core gamers are very hungry for a new machine but the difference between 2005 and now is that the stakes are so much higher,” said Ryan McCaffrey, executive editor at entertainment website IGN.com, harking back to Microsoft’s last Xbox release. “The entire Xbox experiment from Microsoft was for it to be the center piece of your living room.”

To that end, industry-watchers are expecting a raft of improvements from the new Xbox, when Microsoft unveils it at its Redmond, Washington, headquarters on Tuesday, from closer integration with the TV and link-ups with mobile devices to access to new and even exclusive content.

Console gaming still takes the lion’s share of a growing gaming market – about 42 percent of the $65 billion world market, according to Microsoft. But playing games on smartphones and tablets, or as an offshoot to online social networks, is gaining ground fast.

Console sales have been in decline for the last four years, chiefly because of aging devices, but the first of the new generation of machines has not reignited the sector.

Nintendo’s Wii U, launched in November, had sold only 3.45 million units through the end of March, well below the company’s initial forecast of 5.5 million. Hopes for Sony’s PS4, teased in March, are low key.

“The next wave crest isn’t as high as the previous one,” said Lewis Ward, research manager at International Data Corp, who calculates that about 250 million Xbox 360, Sony PlayStation 3 and Nintendo Wii units were sold between 2005 and 2012.

“I do think that consoles as a product category have peaked and the next gen devices won’t match those totals,” he said.

LOW MARGINS

The Xbox itself is not a key financial factor for the world’s largest software maker. Its Entertainment & Devices unit is set to break $10 billion in sales for the first time this year, but that’s half the sales of its Windows unit, and a lot less profitable, averaging less than 15 percent margin compared to 60 percent or higher for Windows or Office.

The company has more than 46 million members who subscribe to its online gaming and digital entertainment service Xbox Live, but that’s still a fraction of the people who pay for its software.

However, the Xbox is still a key weapon in Microsoft’s strategic battle with Google Inc, Apple Inc, Amazon.com Inc and others for a central place in consumers’ lives.

“This (the new Xbox) is of massive importance to Microsoft. It is a piece of a larger war for the consumer that it is battling. They want to be fully integrated with the consumer whether it’s in the living room or mobile,” said P.J. McNealy, CEO and founder of Digital World Research. “Arguably the battle against both Apple and Google for dominating a consumer’s time share more so than taking on Sony and Nintendo directly.”

That means Microsoft will be aiming for many markets at the same time, from the core and casual gamer to the TV watcher and music fan.

To do that, industry watchers expect Microsoft to integrate the new Xbox much more closely to the TV and cable or satellite box, perhaps allowing users to change channel or buy movies with a wave of the hand through its motion-control Kinect sensor. They also expect to hear more about SmartGlass, Microsoft’s app that lets you link an Xbox to a tablet or smartphone.

Users can already get Netflix through the Xbox, and Microsoft recently started its own studio to produce exclusive content, meaning the new device is a gateway to much more than games.

“I think they’re going to try to have their cake and eat it too – they will try to get casual people for entertainment while keeping the hardcore gamers interested,” said McCaffrey at IGN.com. “They want their console on all the time, whether it’s a mom watching Amazon video, the son playing a game and the dad watching (Major League Baseball) TV on another app – that’s their goal.”

(Additional reporting by Edwin Chan; Editing by Lisa Shumaker)

Windows 8 is the first Microsoft operating system primarily designed for touch commands, but it has failed to capture consumers’ imaginations or make a dent in a tablet market dominated by Apple Inc and Samsung Electronics.

“Is it perfect? No. Are there things we need to change? Absolutely. We are being very real about what needs to change and changing it as thoughtfully and quickly as we can”, said Tami Reller, co-head of Microsoft’s Windows unit at the company’s Redmond, Washington headquarters last week, where she announced the latest Windows sales figure, a number made public on Monday.

Microsoft will be rolling out an update to Windows 8, provisionally code-named ‘Windows Blue’, by the end of this year, Reller said. Details of the update will be released in the next few weeks.

Although Microsoft has sold 100 million Windows 8 licenses since launch on October 26, matching Windows 7 sales three years previously, it looks unlikely that the new system will see progressively rising demand, as Windows 7 did, hitting 240 million sales in its first year.

Microsoft’s last Windows 8 sales update was in early January, when it broke 60 million, suggesting only around 40 million license sales in the last four months, well below Windows 7′s average sales rate.

Windows 7 was helped by the fact that it replaced the generally unpopular Windows Vista, whereas Windows 8 has confused many potential customers with its new-look ’tile’-based start screen and the omission of the traditional ‘start’ button.

“The learning curve is real, and we need to address it,” said Reller. “We’re not sitting back and saying, they will get used to it.”

Reller did not say whether the ‘Blue’ update would restore the start button, but she said Microsoft would pay more attention to helping customers adapt.

“We’ve considered a lot of different scenarios to help traditional PC users move forward as well as making usability that much better on all devices,” she said.

TOUCH LAPTOPS

Consumer alienation, and the lack of affordable touch-laptops that can make full use of Windows 8, has held back computer sales, according to industry tracker IDC. PC sales had their sharpest drop on record in the first three months of this year, plummeting 14 percent.

Reller hopes that new machines from firms including Lenovo, ASUS and Hewlett-Packard will change that this year.

“We know customers like touch laptops, but they are also price sensitive,” she said. “Our partners (hardware makers) have to bet on volume, so that they get price breaks, and get that moving into the (retail) channel.”

Microsoft is also tweaking Windows 8 to make it compatible with smaller seven and eight inch tablets, which would allow hardware makers to compete in the fastest-growing segment of the tablet market against Apple’s iPad mini, Samsung’s Galaxy Tab, Google Inc’s Nexus 7 and Amazon.com Inc’s Kindle Fire.

Reller declined to comment on whether Microsoft would make a smaller version of its own Surface tablet.

Microsoft has not made much of an impression in the tablet market so far, notching only 900,000 Surface sales in the first quarter, according to IDC, compared with 19.5 million iPad sales and 8.8 million Samsung tablet sales.

Overall, Reller hopes the ‘Blue’ update and a slew of attractive touch-laptops will fire up interest in Windows machines in all forms.

“I believe that touch will be mainstream in consumer laptops,” said Reller. “I think we’ll be pleased with the progress we’ve made by ‘back to school’ and by holiday (year end), we’ll be at this tipping point where we will say, ‘Now I see it’.”

Microsoft shares closed at $33.75 on the Nasdaq, after hitting their highest level since January 2008 earlier in the session, as the S&P 500 reached an all-time high.

(Editing by Daniel Magnowski)

The world’s largest software company has so far focused on putting its Windows Phone software into expensive, high-end devices – chiefly from Nokia and HTC Corp.

But the new model will go on sale at Walmart later this month at an unsubsidized price under $150, relatively cheap for a new phone running up-to-date software without a long-term contract.

“There is an opportunity for us to offer a very high quality device in the mainstream,” said Terry Myerson, head of the Windows Phone unit, at Microsoft’s campus near Seattle last week. “That’s where we’ve made progress in the last couple of months and it’s a strategy we’ll continue to explore in the United States.”

The Nokia Lumia 521 went on sale on the Home Shopping Network (HSN) last week, where it has already sold out. The 4G phone, sold overseas as the Nokia 520, is essentially a mid-range phone with some high-end features, such as four-inch touch screen, five megapixel camera and high-definition video display.

Next week the phone will go on sale at less than $150 at Walmart, along with T-Mobile US Inc’s $30 per month unlimited data and text plan, which works out much cheaper over the long run than heavily subsidized iPhones and upscale Android devices that generally come with pricy long-term contracts.

The early popularity of the Lumia 521 on HSN is a minor boost for Microsoft, whose mobile plans have stuttered and stumbled since Apple’s iPhone destroyed its early dominance in the smartphone market in 2007.

After completely redesigning its software, Microsoft-powered phones now have 3.2 percent of the U.S. smartphone market, compared to 39 percent for Apple and 52 percent for Google Inc’s Android system, according to comScore.

Nokia, which now only makes smartphones running Windows, sold 5.6 million of its Lumia handsets in the first quarter, up 27 percent from the previous quarter, although that is still dwarfed by 37 million iPhone sales.

Microsoft does not detail overall Windows phone sales or financials, but did say last quarter that phone-related revenue rose by $259 million, which includes licensing revenue from Android phones, which use some technology patented by Microsoft.

Windows phones tend to fare better overseas, where they have as much as 20 percent share in some markets such as Mexico and Poland, and almost 7 percent in Britain, according to Microsoft.

That is partly because the role of powerful carriers such as AT&T Inc and Verizon Wireless, which dominate U.S. phone retail, is less pronounced in overseas markets.

“AT&T and Verizon have been great partners,” said Myerson. “But where the market dynamics are different, and where the operators play a different role, we have done better.”

Heavy up-front subsidies from AT&T and Verizon, in return for long-term service contracts, mean U.S. customers can afford the best hardware from Apple and Samsung. Even though Windows phones are also subsidized, Myerson admits it has been hard to break that lock on the home market.

“It (subsidization) is a compelling business model for them. If you are Samsung, Apple, AT&T or Verizon, it’s where everything’s working, you are growing share, you are growing profits,” said Myerson. “If you are an incumbent with a successful business model, you’re not going to be jumping to throw it out.”

As a challenger to those incumbents, Myerson says Microsoft has to differentiate on more than just price.

After introducing “killer hardware”, he says the next task for Windows phones is to leverage Microsoft’s Office and Xbox products to make a genuinely new phone experience, whether as a work tool or advanced toy.

“I don’t think we’ve come near to the full potential,” he said. “Those are our two dimensions here, Office and Xbox. We want to bring to life getting work done and bring to life that serious fun, here on this thing in your pocket. That’s going to develop over time.”

Myerson played down reports that Microsoft was working on a phone of its own, to follow up on its Surface tablet.

“Nokia’s doing a great job,” he said. “They really are receiving all of our go-to-market energy right now.”

(Reporting by Bill Rigby; Editing by Tim Dobbyn)

Since he quit Microsoft in 1983, the quiet Seattle native
has lost billions of dollars on ill-conceived or mistimed
technology investments, and he has been mocked as a juvenile
playboy manqué for spending lavishly on giant yachts and
off-beat projects like a Frank Gehry-designed rock museum.

But in recent years, Allen’s ventures in decidedly low-tech
sectors – sports teams, commercial real estate and energy
pipelines – have come to look prescient.

Together with a new round of tech investments and an
ambitious philanthropy program, they may yet establish Allen as
much more than Gates’ lucky junior partner.

Allen’s NBA Portland Trail Blazers and NFL Seattle Seahawks,
both purchased years ago for what appeared to be non-business
reasons, are now worth many times what he paid for them. Even
his part-ownership of the Seattle Sounders soccer team, which
draws more fans than any other franchise in its league, is
looking like a good bet.

At the same time, Allen has all but single-handedly
transformed the once-shabby South Lake Union district near
downtown Seattle into the Pacific Northwest’s hippest tech
outpost, anchored by Amazon.com Inc.

And a recent foray into the energy business yielded a $2.25
billion return from a $200 million investment in Plains All
American Pipeline.

These wins are changing the perception of the shy
60-year-old, a two-time cancer survivor who rarely appears in
public.

“He is under-appreciated in Seattle,” said David Brewster,
long-time civic leader, publisher of local news website
Crosscut.com and founder of the Seattle Weekly newspaper. “He’s
remote and reclusive. There’s too much Howard Hughes in the way
he behaves for Seattle truly to appreciate a lot of the good
that he does.”

Personal computer sales fell 14 percent in the first three
months of the year, just as Microsoft tries to ramp up sales of
the latest iteration of Windows. But the company’s ability to
keep hold of big customers rescued its third-quarter results,
which came in better than expected on Thursday.

“Microsoft has successfully transitioned into an enterprise
software company and these results show that, because the
strength of server and tools and the actual way they sell
licenses to business is making up for the missing PC sales,”
said Kim Caughey Forrest, an analyst at Fort Pitt Capital.

Effectively, Microsoft no longer relies on a new PC to make
money from software. Only 20 percent of the company’s product
revenue comes from computer makers paying license fees to put
Windows on their machines. About 45 percent comes from multiyear
licensing agreements with customers – generally big companies
paying millions of dollars for three-year access to Microsoft’s
Windows and Office software.

The strength of that model is reflected in Microsoft’s total
unearned revenue balance – a measure of the strength of its
long-term business – which rose 13 percent from a year earlier
and now stands at $17.1 billion.

“The fact that volume licensing or just the unearned revenue
growth is 13 percent year on year, those are impressive
numbers,” said Sid Parakh, an analyst at investment firm McAdams
Wright Ragen. “That’s saying that customers are in fact buying
into a longer-term roadmap.”

Parakh points out that the dire PC numbers collated by
industry trackers Gartner and IDC do not reflect sales of
Microsoft’s Surface tablet – even though they are modest – or
users upgrading their software without buying new computers. So
even though the rise of new mobile devices is supplanting
desktop PCs, the ubiquity of Microsoft’s products is not fading.

On top of that, its other business-focused units are
performing strongly. The server and tools unit, which makes
server software and runs the data centers that enable remote or
“cloud” computing, increased sales 11 percent in the quarter,
helped by rapid growth in multiyear licensing.

The unit that makes Office – which still owns the corporate
software market – posted a 5 percent increase in sales, after
discounting some deferred revenue – also helped by growing
multiyear deals.

That helped mask the indifferent performance of the Windows
unit, which is still the most reliant on a healthy PC ecosystem.
Excluding gains from deferred revenue, Microsoft’s flagship unit
showed no growth at all, disappointing investors hoping for a
stronger showing from the new Windows 8 system.

Meanwhile, strong Xbox sales and slow improvement in its
nascent phone software business, alongside a narrower loss in
its perennially money-losing online unit, produced figures that
broadly pleased investors.

“Entertainment had a good number and the Windows number
didn’t crater, but it was weak,” BGC analyst Colin Gillis said.

Overall, the company beat Wall Street estimates only because
the average analyst forecast dropped more than 10 percent over
the last two weeks, spurred by the steep drop in PC sales
numbers.

Shares of Microsoft rose 1.5 percent following the results,
though that may offer little comfort to long-term investors in
the stock, which analysts say is mired in essentially the same
place it was 11 years ago. The S&P 500 is up 37 percent over
that time.

Microsoft also announced yet another key executive
departure, this time Chief Financial Officer Peter Klein.

He is at least the seventh top Microsoft executive to leave
the company in the last five years, and while Klein was never
seen as a candidate to succeed Chief Executive Steve Ballmer,
his departure is still another headwind for the company.

“The CFO departure is a little bit troubling. We’ve had a
lot of executives leaving Microsoft recently,” said Brendan
Barnicle, an analyst at Pacific Crest Securities. “Investors are
generally disappointed by the company’s under-performance.”

Klein, an 11-year Microsoft veteran, is the latest in a line of top-level executives to leave the company, following Windows head Steven Sinofsky last November. Some have questioned whether Chief Executive Steve Ballmer is still the right leader for Microsoft, whose shares have remained essentially flat for the last decade.

Microsoft shares rose 1.5 percent in after-hours trading.

The company reported a profit of $6 billion, or 72 cents per share, in the fiscal third quarter, up from $5.1 billion, or 60 cents per share, in the year-ago quarter. That beat Wall Street’s average estimate of 68 cents, according to Thomson Reuters I/B/E/S.

Analysts have been pegging back profit forecasts for Microsoft in the light of flagging PC sales.

Profit was boosted by some deferred revenue from its Windows, Office and video game operations, but cut severely by a big fine by European antitrust regulators for breaking promises relating to expanding the choice of Internet browsers on Windows.

Sales rose to $20.5 billion from $17.4 billion a year ago, in line with analysts’ estimates.

(Reporting by Bill Rigby)

The huge drop over a year ago, the steepest since
International Data Corp started publishing sales numbers in
1994, mark a new milestone in the apparent decline of the age of
the PC as computing goes mobile via tablets and smartphones.

Total worldwide PC sales fell 14 percent to 76.3 million
units in the first quarter, IDC said on Wednesday, exceeding its
forecast of a 7.7 percent drop. It was the fourth consecutive
quarter of year-on-year declines.

That marked the lowest level since the middle of 2009,
according to competing data tracker Gartner Inc, which published
its own figures showing an 11 percent decline on the same day.

Both firms blamed the sales drop on fading sales of
netbooks, the small laptops that have been rendered obsolete by
tablets, and more consumer spending going toward smartphones.

“Consumers are migrating content consumption from PCs to
other connected devices, such as tablets and smartphones,” said
Mikako Kitagawa, an analyst at Gartner. “Even emerging markets,
where PC penetration is low, are not expected to be a strong
growth area for PC vendors.”

Microsoft’s new Windows 8 actually deterred potential PC
buyers, IDC said, as users felt they could not afford
touch-screen models required to make the most of Windows 8, even
though the system runs equally well on standard PCs and laptops.

“People think they have to have touch, and they go look at
the price points for these touch machines, and they are above
where they want to be and they say, ‘I guess I’ll wait,’” said
Bob O’Donnell, an analyst at IDC.

O’Donnell said other users were simply uncomfortable with
the new Windows system, which dispensed with the familiar start
menu and uses colorful ’tiles’ to represent applications.

New Microsoft operating systems usually boost PC sales, but
the lukewarm reception for Windows 8 will likely mean an even
greater drop in the market this year, said Jay Chou, senior
research analyst with the IDC unit that tracks PC sales.

“Users are finding Windows 8 to offer a compromised
experience that doesn’t excel either as a new mobile interface
or in a classic desktop interface,” he said. “As a result, many
users find a decline in the traditional PC experience without
gaining much from new features like touch. The result is that
many consumers are worried about upgrading to Windows 8, to say
nothing of business users who are still just getting into
Windows 7.”

Among manufacturers, Hewlett-Packard Co saw a 24
percent decline in sales in the quarter, but narrowly held on to
its title of No. 1 global PC supplier, with 15.7 percent market
share. Fast-growing rival Lenovo Group managed to keep
sales flat and is now just behind HP with a 15.3 percent global
share.

Dell Inc, roiled by plans to go private, along with
rivals Acer Inc and Asustek, all saw
double-digit declines in PC sales.

Apple Inc was not immune from the decline, as some
sales of its own Macs appeared to be displaced by iPads. Its
U.S. PC sales fell 7.5 percent in the quarter, but it held on to
its spot as No. 3 U.S. PC manufacturer, behind HP and Dell.

The huge drop over a year ago, the steepest since
International Data Corp started publishing sales numbers in
1994, mark a new milestone in the apparent decline of the age of
the PC as computing goes mobile via tablets and smartphones.

Total worldwide PC sales fell 14 percent to 76.3 million
units in the first quarter, IDC said on Wednesday, exceeding its
forecast of a 7.7 percent drop. It was the fourth consecutive
quarter of year-on-year declines.

IDC blamed the drop on fading sales of netbooks, the small
laptops that have been rendered obsolete by tablets, and more
consumer spending going toward smartphones.

Microsoft’s new Windows 8 actually deterred potential PC
buyers, IDC said, as users felt they could not afford
touch-screen models required to make the most of Windows 8, even
though the system runs equally well on standard PCs and laptops.

“People think they have to have touch, and they go look at
the price points for these touch machines, and they are above
where they want to be and they say, ‘I guess I’ll wait,’” said
Bob O’Donnell, an analyst at IDC.

O’Donnell said other users were simply uncomfortable with
the new Windows system, which dispensed with the familiar start
menu and uses colorful ’tiles’ to represent applications.

New Microsoft operating systems usually boost PC sales, but
the lukewarm reception for Windows 8 will likely mean an even
greater drop in the market this year, said Jay Chou, senior
research analyst with the IDC unit that tracks PC sales.

“Users are finding Windows 8 to offer a compromised
experience that doesn’t excel either as a new mobile interface
or in a classic desktop interface,” he said. “As a result, many
users find a decline in the traditional PC experience without
gaining much from new features like touch. The result is that
many consumers are worried about upgrading to Windows 8, to say
nothing of business users who are still just getting into
Windows 7.”

Among manufacturers, Hewlett-Packard Co saw a 24
percent decline in sales in the quarter, but narrowly held on to
its title of No. 1 global PC supplier, with 15.7 percent market
share. Fast-growing rival Lenovo Group managed to keep
sales flat and is now only narrowly behind HP with a 15.3
percent global share.

Dell Inc, roiled by plans to go private, along with
rivals Acer Inc and Asustek, all saw
double-digit declines in PC sales.

Apple Inc was not immune from the decline, as some
sales of its own Macs appeared to be displaced by iPads. Its
U.S. PC sales fell 7.5 percent in the quarter, but it held on to
its spot as No. 3 U.S. PC manufacturer, behind HP and Dell.

Walli Mujahidh, 34, was one of two men who had planned to storm the Military Entrance Processing Station south of downtown Seattle with machine guns and grenades in retaliation for U.S. military actions in Afghanistan. Enlistees are screened and processed at the station.

The other conspirator Abu Khalid Abdul-Latif, also known as Joseph Anthony Davis, was sentenced to 18 years in prison last month.

The pair, both U.S. citizens, were arrested in June 2011 and pleaded guilty to conspiracy to murder officers and agents of the United States and conspiracy to use weapons of mass destruction. Grenades are treated as weapons of mass destruction under U.S. federal law.

In his plea agreement, Mujahidh admitted that he had agreed to carry out the planned attack and that he had traveled to Seattle from Los Angeles to take part in it.

The plot came to light after a person who had known Abdul-Latif for several years and had been asked to supply weapons for the planned attack went to police instead and became a paid undercover informant, according to court documents.

In a “sting” operation, high-powered assault rifles that had been rendered inoperable by law enforcement agents were brought by the informant to the two suspects, who were arrested when they took possession of the guns, according to prosecutors.

(Reporting by Bill Rigby)