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)

Take-Two Interactive stock rose about 5 percent to $17.19 in after-hours trading after closing at $16.39 on Nasdaq.

For the three months ended March 31, net revenue rose to $299.5 million from $148.1 million in the year-ago period.

The games maker forecast non-GAAP revenue for the fiscal year 2014 to end-March to be in the range of $1.75 billion to $1.85 billion and earnings of $2.05 to $2.30 per share. This was in line with the average estimates of Wall Street analysts who expect $1.78 billion in revenue and earnings of $2.26, according to Thomson-Reuters I/B/E/S.

The company delayed the release of its much-anticipated new title from its “Grand Theft Auto franchise to September from its previous spring release window. In January, it said “Grand Theft Auto V” will be released on September 17 for the Xbox 360 and PlayStation3 consoles.

“We have a meaningful expectation on that title and that has a significant influence on the year,” Strauss Zellnick, Chairman and CEO said in an interview.

Non-GAAP net revenue, adjusted for deferred revenue and other items, more than doubled to $303.1 million from $148.1 million over the same period. That beat the $280.1 million average estimate of analysts polled by Thomson-Reuters I/B/E/S.

Non-GAAP income was 38 cents per share, exceeding Wall Street’s view of 23 cents.

Fourth-quarter sales were driven primarily by “Borderlands 2,” “BioShock Infinite” and “NBA 2K13,” Zellnick said.

(Reporting by Malathi Nayak; Editing by Phil Berlowitz, Richard Chang and David Gregorio)

Activision shares were down 6.3 percent at $14.30 in after-hours trading after closing at $15.26 on the Nasdaq.

The company, known for its “Call of Duty” and “Skylanders” games, slightly raised its 2013 revenue and earnings forecast to $4.25 billion and 82 cents per share, compared with $4.18 billion and 80 cents provided at the end of the last quarter ended January 30.

Its 2013 outlook was below the view of Wall Street analysts, who expected the company to forecast revenue of $4.27 billion and earnings at 85 cents per share.

Subscribers of “World of Warcraft,” Activision’s most profitable business and the source of a steady stream of subscription-based revenue, dropped sharply to 8.3 million last quarter from 9.6 million in the previous quarter, the company said.

The video game industry is struggling with flagging sales as players migrate from to buying packaged games for consoles to free or less-expensive offerings on mobile devices.

Moreover, consumers have held back from buying hardware and software as they await new versions of Sony Corp’s PlayStation and Microsoft Corp’s Xbox, which are expected later this year.

Nintendo Co Ltd’s new Wii U console, which was launched in November, has disappointed investors with its lackluster sales, casting doubt on the industry’s hope that new consoles could boost prospects.

While the company was cautious about its near-term outlook, Activision Blizzard is confident about long-term prospects, Kotick said in an interview.

“This period of console transition can be volatile, but we think our strategy is a sensible one,” Kotick said.

Unlike Activision Blizzard, rival Electronic Arts Inc on Tuesday forecast fiscal 2014 earnings above Wall Street’s expectations.

However, Activision Blizzard’s warning overshadowed strong first-quarter earnings.

The Santa Monica-based company said non-GAAP revenue, adjusted for the deferral of digital revenue and other items, rose to $804 million, surpassing Wall Street’s average revenue forecast for $704.6 million and up 37 percent from $587 million in the same quarter a year ago.

Non-GAAP income totaled $199 million, or 17 cents per share, in the fourth quarter, compared with $67 million, or 6 cents per share a year earlier. This beat Wall Street’s average earnings estimate of 11 cents per share, according to Thomson Reuters I/B/E/S.

This year, Activision’s top releases include shooter game “Call of Duty: Ghosts”, which will compete with EA’s “Battlefield 4″ over the holiday period. The company’s kids game, “Skylanders SWAP Force”, will battle Disney’s “Infinity” and be released in August.

(Reporting by Malathi Nayak; Editing by Richard Chang, G Crosse and Andre Grenon)

Electronic Arts, which like the rest of the industry is struggling as players migrate to more casual games such as Angry Birds on mobile devices, estimated fiscal 2014 profit, excluding certain items, of $1.20 a share, beating an average estimate of $1.10.

Shares of Electronic Arts rose to $20 in after-hours trading on Tuesday after closing at $18.41 on Nasdaq.

Digital revenue rose 45 percent year-over-year to $618 million, larger than EA’s packaged goods business in the quarter ended on March 31.

EA has been cutting staff and reorganizing studios in recent months to embrace new game platforms, cut costs and adapt to tougher market conditions. The publisher is preparing to adopt the next-generation video game console technology in its games.

Consumers have held back from buying hardware and software as they await new versions of Sony Corp’s PlayStation and Microsoft Corp’s Xbox expected later this year.

For fiscal 2014, the video game maker forecast revenue of $4 billion, in line with Wall Street’s expectations, according to Thomson-Reuters I/B/E/S.

For the latest quarter, total revenue declined to $1.2 billion from $1.37 billion a year ago. Adjusted revenue rose 6.4 percent to $1.04 billion from a year ago, barely beating analysts’ average estimate of $1.03 billion according to Thomson-Reuters I/B/E/S.

Net income fell to $323 million, or $1.05 per share, from $400 million, or $1.20 per share, a year ago.

Weakness in the packaged games market dented revenue, but EA recognized $120 million of deferred payments from its shooter Battlefield Premium game service in the fourth quarter, Chief Financial Officer Blake Jorgensen said.

(Reporting by Malathi Nayak; Editing by Richard Chang)

Violent “first-person shooter” games such as “Call of Duty”
are the bread and butter of leading video game publishers, and
authenticity all but requires that they feature brand-name
weapons.

Electronic Arts licensed weapons from companies like
McMillan Group International as part of a marketing
collaboration for “Medal of Honor: Warfighter.” Activision
Blizzard gives “special thanks” to Colt, Barrett and
Remington in the credits for its “Call of Duty” titles.

Rifles by Bushmaster, which made the gun used in the
Newtown, Connecticut school shooting last December, have
appeared in the hugely popular “Call of Duty.”

Yet, in the wake of the Newtown shooting, the biggest
advocate for gun ownership, the National Rifle Association, took
aim at videogames to explain gun violence. One week after 20
schoolchildren and six adults were killed in the shooting, NRA
chief executive Wayne LaPierre called the videogame industry “a
callous, corrupt and corrupting shadow industry that sells, and
sows, violence against its own people.”

Now at least one game maker, the second largest by revenue
in the United States, is publicly distancing itself from the gun
industry, even as it finds ways to keep the branded guns in the
games. Electronic Arts says it is severing its licensing
ties to gun manufacturers – and simultaneously asserting that it
has the right, and the intention, to continue to feature branded
guns without a license.

For the gunmakers, having their products in games is “free
marketing, just like having Coca-Cola” in a movie, said Roxanne
Christ, a partner at Latham & Watkins LLP in Los Angeles, who
works with video game companies on licensing, but has not
personally done a gun deal.

Yet it is also a virtual double-edged sword. “It gives
publicity to the particular brand of gun being used in the video
game,” said Brad J. Bushman, a professor at Ohio State
University who has studied video game violence. “On the other
hand, it’s linking that gun with violent and aggressive
behavior.”

Gun makers, including the Freedom Group that owns
brands like Remington and Bushmaster, and the NRA, did not
respond to repeated requests for comment from Reuters.

‘ENHANCED AUTHENTICITY’

First-person shooter games let players blast their way
through battlefields while looking down the barrel of a virtual
gun, taking aim with the flick of a controller.

Some of those guns – like the Colt M1911 pistol in “Call of
Duty” – turn sideways to face the screen during reloading,
revealing the brand name. Games also offer lists of branded
weapons to choose from.

Licensed images of weapons in “Medal of Honor: Warfighter” -
a game that simulates military missions like fighting pirates in
Somalia – offer what EA spokesman Jeff Brown calls “enhanced
authenticity.”

Back in the late 90′s, video game makers initially
approached gun companies for licenses to inoculate themselves
from potential lawsuits, video game industry lawyers say. Over
the years, legal clearances were granted for little or no money
by gunmakers, these lawyers said.

Yet overt signs of cooperation between the video game and
gun industries had begun to draw criticism even before the
December school shooting in Connecticut.

In August, game fans and some video game news outlets
vehemently objected to EA putting links to weapons companies
like the McMillan Group and gun magazine maker Magpul, where
gamers could check out real versions of weapons featured in the
game, on its “Medal of Honor: Warfighter” game website.

“What kind of message is a video game publisher like EA
sending when it encourages its players to buy weapons?” asked
Laura Parker, the associate editor of gaming site GameSpot
Australia in a post in August.

EA immediately removed the links and dropped the marketing
tie-up, which it said was part of a charity project to raise
money for military veterans. The company said it received no
money from its gun company partners.

“We won’t do that again,” said Brown. “The action games we
will release this year will not include licensed images of
weapons.”

EA said politics and NRA comments critical of game makers
had nothing to do with its decision. “The response from our
audience was pretty clear: they feel the comments from the NRA
were a simple attempt to change the subject,” Brown said.

EA also says video game makers can have branded guns in
their games without getting licenses, meaning the industry could
drop the gun companies and keep their guns.

Activision, the industry leader, declined to comment on
whether it licenses gun designs from gun manufacturers or if it
would stop doing so. Branded guns have consistently been
featured in its blockbuster shooter games like the decade-old
“Call of Duty.”

“We’re telling a story and we have a point of view,” EA’s
President of Labels Frank Gibeau, who leads product development
of EA’s biggest franchises, said in an interview. “A book
doesn’t pay for saying the word ‘Colt,’ for example.”

Put another way, EA is asserting a constitutional free
speech right to use trademarks without permission in its
ever-more-realistic games.

Legal experts say there isn’t a single case so far where gun
companies have sued video game companies for using branded guns
without a license.

But EA’s legal theory is now being tested in court. Aircraft
maker Bell Helicopter, a unit of Textron Inc, has argued
that Electronic Arts’ depiction of its helicopters in
“Battlefield” was beyond fair use and amounted to a trademark
infringement. EA preemptively went to court, suing Bell
Helicopter to settle the issue.

The U.S. District Court, Northern District of California,
has set a jury trial for the case in June.

Disney, which bought George Lucas’s Lucasfilm Ltd and the
blockbuster sci-fi franchise for $4.05 billion in October, will
retain the rights to develop online and mobile games, both
companies said in a statement on Monday.

They did not reveal the financial terms of the agreement.

EA bet big on the Star Wars’ world of jedis and wookies in
2011 by releasing its “Star Wars: The Old Republic” – a massive
multiplayer player online game, or MMO, that allows thousands of
people to play simultaneously for a monthly subscription fee as
opposed to a one-time purchase.

Analysts said EA made a record investment of between $100
million and $300 million to build “Star Wars: The Old Republic,”
but EA has not disclosed costs. It hired more than 1,000 voice
actors for “Star Wars: The Old Republic,” which broke a game
industry record.

But the game has struggled to retain players, prompting the
company to offer 15 game levels for free in June last year. And
in November, it launched a free-to-play version of the game.

Disney, which has its own interactive games division, last
month shut the 30-year-old LucasArts games studio it inherited
with the acquisition to focus on licensing its “Star Wars” brand
externally.

EA shares were up 2 percent at $18.67 and Disney’s stock was
up slightly at $65.17 in after-hours trading.

The company sent out media invitations on Wednesday, hinting it would be announcing the successor to its seven-year old Xbox 360. A new console from the software company will come on the heels of rival Sony’s announcement in February that it will launch the PlayStation4 this holiday season.

Microsoft’s May event will be held at its Xbox campus in Redmond, Washington, just a month before the Electronic Entertainment Expo (E3) in Los Angeles, the gaming industry’s largest annual convention, where next-generation consoles will be spotlighted.

“On May 21, we’ll mark the beginning of a new generation of games, TV and entertainment,” the company said on its official blog.

The Xbox 360 is the market-leading console that has an installed user base of 76 million. Gaming blogs have been afire with speculation about what features a next-generation console might offer, but Microsoft has been tight-lipped so far.

The current version of the Xbox sports voice- and gesture-command capabilities.

Shares in Microsoft were up 3.1 percent at $31.53 in the afternoon.

(Reporting By Malathi Nayak; Editing by Kenneth Barry)

The company, known for its “FIFA” and “Sims” games, declined to divulge the number of jobs affected, or how many employees it has in Montreal, where it has developed console games like “Army of Two”.

“EA is sharpening its focus to provide games for new platforms and mobile. In some cases, this involves reducing team sizes as we evolve into a more efficient organization,” the Redwood City, California-based company said in a statement.

The Montreal studio, which includes a team that makes mobile games, is not closing, a spokesman said. He declined to say which teams within the studio had been affected by the job cuts.

The layoffs come shortly after John Riccitiello stepped down as CEO on March 30, after taking responsibility for missed operational targets.

Former CEO and Chairman Larry Probst has been appointed executive chairman as the company begins its search for the next CEO.

EA and rivals like Activision Blizzard Inc have seen growth fall off sharply as more gamers flock to free games on social networks or on mobile devices. The biggest traditional games publishers have tried to buy startups, reorganize existing studios and invest in mobile platforms but face intense competition from entrenched players like Rovio or Zynga Inc.

EA has been reorganizing studios to embrace new game platforms and adapt to consumer behavior. Last year, EA’s PopCap unit, which makes social and mobile games, laid off 50 of about 380 staff members in its Seattle and Vancouver studios to focus on free-to-play social and mobile games.

The game publisher is also preparing to adopt the next-generation video game console technology in its games. Consumers are holding back from buying hardware and software as they wait for next-generation versions of Sony Corp’s PlayStation and Microsoft Corp’s Xbox, expected later this year.

Shares of EA edged higher in extended trading after closing at $17.63 on Nasdaq.

(Reporting by Malathi Nayak; Editing by Richard Chang)

Kaspersky Lab warned on Thursday that an organization it christened “Winnti” had infiltrated the servers of at least 35 game developers and publishers, mostly in East Asia including South Korea, but also in Germany, the United States, Japan, China, Russia, Brazil, Peru, and Belarus.

The cybersecurity firm said it found evidence that the hackers attempted to steal proprietary software code, possibly to develop pirated versions of online games, or to steal in-game currency that can be converted into real money.

The campaign, which began in 2009 and is still active today, had an unusually wide reach because it targeted so-called “massively multiplayer games,” which can involve millions of users across different countries, according to Kaspersky.

The victims include South Korea’s Neowiz, Mgame Corp, Nexon Corp and privately held U.S.-based Trion Worlds, Kaspersky said.

Neowiz did not respond to requests for comment, while Trion and Nexon declined to comment. Mgame said it had no immediate comment.

Kaspersky said it was unclear how much damage the hackers caused in the campaign. Kaspersky was not given full access to all the infected servers, but some gaming companies reported malicious software in certain processes that suggested the hackers manipulated virtual currencies — such as the “gold” that games typically accumulate in online role-playing games.

“We could not verify, but one obvious possibility would be to manipulate (the) internal state of the game to the advantage of the attackers,” said Kaspersky Lab’s senior security researcher, Kurt Baumgartner.

He said the hackers stole digital certificates, which can be used to authenticate software and gain access to computers. There was evidence that some of the digital certificates that Winnti stole were used by other groups with different agendas. For example, the certificates were used to spy on the computers of Tibetan and Uyghur activists, Baumgartner said.

“We believe that the source of all these stolen certificates could be the same Winnti group. Either this group has close contacts with other Chinese hacker gangs, or it sells the certificates on the black market in China,” Kaspersky Lab said.

Major corporations around the world have lost data to hackers in China and elsewhere for years. But the number of companies publicly admitting such breaches has been growing. Apple, Microsoft, Twitter, and Facebook confirmed attacks in a recent campaign.

Kaspersky is still investigating Winnti. The Moscow-based security firm has discovered significant malicious software campaigns in the past, including one known as “Flame” that spied on industrial facilities in Iran.

The security firm was first called in to investigate in 2011 when malware was discovered on the computers of users across the globe, all of whom were players of a popular online game that it did not specify.

The malware was traced to a downloaded update from the unidentified game publisher’s servers.

Kaspersky found that the attackers had managed to install a trojan — malware granting surreptitious access to compromised machines — on the company’s servers. Closer scrutiny showed the group employed similar tactics against other game publishers.

(Editing by Tiffany Wu and Leslie Gevirtz)

The closure will involve an unknown number of layoffs. A
“small team” will remain to handle licensing partnerships but
all inhouse development has been halted, including its
much-anticipated title “Star Wars 1313″, said Miles Perkins, a
spokesman for Lucasfilm Ltd.

Film producer, screenwriter and director George Lucas is
best known as the creator of the “Star Wars” franchise. He sold
Lucasfilm to Disney last October.

It is unclear how many people are employed by LucasArts. A
source close to the company said that affected workers will be
informed on Wednesday.

The Lucasfilm spokesman declined to disclose the number of
employees currently at LucasArts or those affected by the
shutdown.

Disney, which last year announced it will pay $4.05 billion
for Lucasfilm and has its own interactive games division, is
several months into an internal cost-cutting review. The
decision to shutter LucasArts comes as the developer and
publisher, once known for humor-tinged adventure games like
“Secret of Monkey Island”, has struggled in recent years to
produce a hit in an industry increasingly dominated by
action-oriented games.