The truly inside story of starting the Xbox and Zune businesses at Microsoft was shared in a remarkable lecture Friday by Robbie Bach, the retired president of the company's entertainment and devices business.

Bach shared his unique perspective on why the Xbox was a success and the Zune was not during a presentation on intrapreneurship, or how to operate like a startup and launch new ventures within a large, existing business.

The lecture included advice for companies looking to foster entrepreneurial culture, and for all sorts of entrepreneurs entering competitive new markets. It was a breakfast event held by the Northwest Entrepreneur Network in South Lake Union.

Bach described the corporate retreats where the Xbox business was hatched and how Sony fumbled its lead and gave Microsoft the opportunity to get ahead in the console business.

"When the luck happens, you take advantage of it and run with it," he said.

It also helped that Bach's startup had $5 billion to $7 billion in funding available, he joked.

That wasn't enough to help the Zune, though. Bach admitted that Microsoft quickly realized it was too late to prevail in the portable media player business and in hindsight he would have built a music service rather than devices. Apple executed well and didn't give Microsoft the sort of breaks it had in the console business, he noted.

Bach's now focused on philanthropic organizations, serving on the board of audio gear company Sonos and looking to buy a mid-size family business like the food-service supplies distributor that his father operated in retirement.

Here's a raw video of the event. Apologies for the quality; it was taken with a new smartphone that was supposed to capture high-def video ...:

More TV services are now available for the Xbox. But they're not for cord-cutters.

Instead, they're designed for people who already subscribe to those services, and want to extend them through the game console to another room in the house. They also require console owners to subscribe to Microsoft's premium Xbox Live service.

Perhaps this will lead to the Xbox doing double-duty as a cable box -- as it does in some regions overseas already -- but for now the additions mostly bring the console's video options in line with wireless TVs and streaming video adapters. It also showcases the ability to use the Kinect sensor as a remote control using voice and gestures.

Either way Xbox users are taking to the entertainment services. Usage of entertainment apps on the console has doubled over the last year, overtaking the time spent playing multiplayer games on the system, Microsoft said in its release.

Subscribers to Xbox Live Gold service now spend an average of 84 hours per month on the service, and its Zune video store is now the world's second-largest online video store, the company said.

Video consumption via the Xbox is likely to grow further after today's announcement that Comcast, HBO and MLB services have joined the console's video lineup, nine months after they were announced at last June's E3 game conference. The lineup was confirmed in October and began appearing in December -- helping to goose holiday sales of the console -- but it has taken awhile to get the lineup filled out.

Comcast, in particular, appears complicated. The company isn't providing the same on-demand library on the console as it provides through cable boxes and other devices, according to documentation called out by bloggers over the weekend.

Comcast also is excluding content streamed to the Xbox from data consumption limits that it applies to broadband customers, raising a net neutrality question around preferential treatment the dominant cable company is providing to its own video service, Ars Technical noted.

To receive the Comcast video via the Xbox, you need to have the console, a digital cable subscription and a digital cable box in the home.

UPDATE: On top of all that, glitches caused problems for some people trying to set up the Comcast Xfinity app, according to blogger Ed Bott. Perhaps this helps explain why it took so long for the app to appear.

The HBO Go app brings HBO's full catalog to the console, where it's searchable by voice. That's if you already subscribe to HBO through a cable provider.

UPDATE: It turns out the app won't work on an Xbox for Comcast Xfinity subscribers, because Comcast and a few other large cable providers aren't supporting it. The statement from HBO spokeswoman Laura Young:

Comcast/Xfinity, Time Warner Cable and Bright House are currently not supporting HBO GO on Xbox 360. They do, however, support HBO GO online and through the HBO GO mobile app (iPad, iPhone, select Android smartphones).

The following television providers are supporting HBO GO on Xbox 360: AT&T, BendBroadband, Blue Ridge Communications, Cablevision, Charter, Cox, Directv, Dish, Grande Communications, HTC Digital Cable, Massillon Cable/Clear Picture, Mediacom, Midcontinent Communications, RCN, Suddenlink, Verizon and Wow.

We believe that HBO GO is a great enhancement to the HBO subscription so we remain hopeful that all of our distributors will support the service on all platforms in the near future. We encourage our subscribers at non-participating television providers to reach out to their provider and request that they add support for HBO GO on Xbox 360.

MLB.TV is providing customers of its premium-level pay TV service 2,430 games (not 2,429 or 2,431 ...) to watch in high-definition live or in a condensed recap format on the Xbox. The service provides home and away broadcast feeds for out-of-market regular season games "where available," according to the release. It can be controlled with voice and motion controls using the Kinect sensor.

If Microsoft is ever going to have its Alec Baldwin moment, it will happen because of a home-brew game called "Wordament."

Baldwin was famously thrown off a plane in December because he wouldn't stop playing an addictive word game on his iPhone.

The actor was playing "Words With Friends," Zynga's Facebook version of Scrabble played by more than 8 million people a day.

So far the closest thing on the Windows Phone platform is "Wordament," an extracurricular project of two Microsoft employees that became a surprise hit after its debut last year.

The free, ad-supported app is a twist on the word-hunt board game "Boggle." You compete with players around the world in two-minute matches and work your way up leader boards.

It's still a pipsqueak in the broader world of mobile games, with hundreds of thousands of downloads since it appeared on Windows Phone in April 2011 and on Windows 8 last month. It has tens of thousands of unique visitors a day, with up to about 650 playing together at once.

But as one of the highest-rated, exclusive games on those platforms, it's positioned to lift off. It may even draw people to Microsoft's fledgling mobile devices, at least if they're "Boggle" fans.

The game was created as a side project by John Thornton, 37, and Jason Cahill, 38, who worked on the Windows Live photo team and had offices next to each other. They built the game after Microsoft began a "moonlighting" program in 2010, encouraging employees to build Windows Phone apps in their free time.

Thornton (left) began tinkering with word games and made a New Year's resolution in January 2011 to build an app a month. One was a prototype puzzle game he showed to Cahill and asked if he wanted to help. The answer was no, initially.

Cahill (right) and his wife were "Boggle" fans who played against each other wirelessly on Nintendo DS handhelds. The more he thought about the possibilities of a computer-generated game board connected via Internet services, the more excited he became about the project.

"I went home after telling him this whole lecture on how the way you get ahead at work is by doing work and not by doing moonlighting ... and ground all weekend,"Cahill said. "I came in Monday with a basic implementation of a service and a set of puzzles and I was like, 'OK, can I help on this half' ?"

This still cracks up Thornton.

"He must have coded the whole weekend after telling me no," he said. "It was kind of funny."

Thornton said the game's popularity sank in for him a few months later, at the Kirkland Fourth of July parade. Looking over the shoulders of a row of people in front of him, he noticed they were all playing the game.

Later that month, the Xbox Live group asked them to distribute "Wordament" through the game service. The Xbox group then hired them, where they're now the principals of a new studio expanding "Wordament" and developing new titles.

I heard about "Wordament" last year from a friend and fellow "Boggle" fan at Microsoft and was planning to write about the game after the Windows 8 preview version (left) was released in February. But I waited, partly because the game froze on a Samsung Windows 8 tablet I've been using. I wondered if the newsroom installed some kind of filter, because I'd spent so much time testing "Wordament" on the tablet.

Finally I got in touch with Cahill last week, and he explained that the Windows 8 version is a prototype and they're preparing a fix for the "suspend/resume" issue I encountered. Meanwhile, the trick to unfreezing it is the "downward swipe" gesture that closes and exits Metro-style apps.

The game can be played with a mouse but it works best with touch-screens, on which you mark words by sliding your finger across the letters. Speed and responsiveness are critical, so the game's a good way to sample the performance of a phone or tablet.

"Wordament" seems to be a game that Xbox Live could use to expand on platforms such as Apple's iPhone and iPad.

I wonder if "Wordament" will end up preloaded, alongside "Solitaire," on Windows Phones or Windows 8 tablets when they appear later this year.

The original goal with "Solitaire" on Windows was to teach people to use a computer mouse, so perhaps "Wordament" will help familiarize people with the new Windows 8 touch gestures.

That would propel the game into the "Words With Friends" league.

It could also offset productivity gains promised by the new software, though, and potentially cause problems for Alec Baldwin types.

Microsoft is resurrecting one of its oldest franchises, "Flight Simulator," with an entirely new game called "Microsoft Flight" that's debuting on Feb. 29.

But instead of a new installment of the hyper-realistic, encyclopedic simulator that mostly appealed to flight enthusiasts, Microsoft built a smaller, more accessible game that's going to be offered online for free.

Planes can be flown simply by moving a mouse around, though enthusiasts can also use more realistic and complex controls.

It's also a new business direction for Microsoft's PC game business, which is using "Flight" to experiment with free online games monetized through microtransactions. About 80 percent of U.S. gamers now play such titles, mostly through Facebook, where players spend an average of $29 per month, according to Parks Associates research.

To start, the game will let people fly around Hawaii - the Big Island - in planes including a Boeing Stearman similar to one displayed at the Museum of Flight. For $20 players can get seven additional islands, new missions and an additional plane.

Microsoft will periodically offer new territories, planes and activities. The company may also extend the franchise to other devices beyond the PC. Executive Producer Joshua Howard hopes the game will draw more than 20 million players eventually.

Howard (left) leads a studio with about 50 employees, a third of whom are veterans of the ACES Studio behind "Flight Simulator" that Microsoft wound down in 2009.

Here are edited excerpts of an interview this week with Howard:

Q: Gaming on Windows has seemed to languish, maybe because so much energy was around Xbox. How much is this release a sign that the Windows game group is back, especially with Windows 8 coming up soon?

A: Some folks on my team will say Games on Windows isn't what it used to be. You're forgetting it is certainly the biggest platform for gaming anywhere, ever. I feel like the PC has been the most successful platform when it comes to gaming because gaming as a whole has become mainstream - 75 million people playing Facebook games of one form or another, that's all on a PC. It didn't happen on a console, it didn't happen on a closed mobile platform.

As Microsoft - to have built that system and allowed that to happen - we don't get to take credit for everything people do on a PC but that didn't happen because we ignored PC gaming. So I think PC gaming is alive and well in fantastic ways in fantastic ways. It's still where the heart of innovation is happening.

Q: I didn't mean PC gaming as much as PC game development within Microsoft. Perhaps the company felt it no longer needed to seed the market so much?

A: It's doing very well so that's right, maybe that's part of what it came down to.

Q: Is Flight intended to seed online services and bring people into Microsoft's online realm?

A: I like to think this is both about reimagining a franchise that we know has always been successful. I also think it's part of Microsoft the studio saying 'I want to develop this new muscle.' Maybe because we have so much of the organization focused on the console-side of the business which is more rigid when it comes to business models, you get to ask the PC side to be a little more experimental, a little more exploratory. I relish that opportunity and the team has really jumped on that. We couldn't be doing half the things we do here on a console - this is not a console game that just happens to sit on a PC. This is really a PC game and we're proud of that.

Q: Is your studio just building this title?

A: I imagine this is a group of people who will continue to bring flying experiences out over time. This is where we are right now.

Q: One you've developed new muscles, you want to keep using them ...?

A: There are a lot of really cool, exciting platforms on the horizon. I'd love to think that someday you'll be hearing from me about how we're going to bring Flight to those exciting opportunities.

Q: On tablets and other devices with Windows?

A: It could be broader than that even. As a division we no longer organize around your PC games and your console games. We're a team that's about the thrill and experience of flight.

Q: But it makes sense that your games could be on the new PC form factors running Windows ... like tablets, maybe TVs - the "three screens and a cloud"?

A: Yeah. I believe in crawl, walk, run. We're rebooting a franchise, and that was really hard. We wanted to this well. We took the time and energy to do that. Now this becomes a platform to keep going.

Q: Is it running on Azure and will it be used to showcase the platform's ability to run a massively multiplayer online game?

A: The services could be on Azure but they're not today. It turns out they didn't need what Azure provides as far as scale goes. It's less MMO in that sense. While do have what we think of as interesting and enjoyable multiplayer, it's still not that massive. (Up to 16 players can play together in an online session.)

Q: So the focus is on the PC experience mostly?

A: Yes. The way we talk about it is between the client, and the web site and the community that combines them, that's what Flight means. It's this combination of those three elements working together.

Q: It sounds like a hybrid PC game.

A: Exactly. In many respects we are like an MMO business would be run, we just don't happen to be an MMO. We're taking what is traditionally a game studio and transitioning it into an online business.

Q: Why did Microsoft take so long to resume development of MMO PC games?

A: I think the reality internally is we've continued to incubate and play and continue to try things. You just don't always bring those to market or out until you believe you've got something you can be successful with. I was excited to see that instead of trying innovate in these genres that are already well-understood, Microsoft went off and tried Kinect. I think Microsoft just put their energies elsewhere and it paid off.

Q: Will you sell the game on discs at retail?

A: Sometime maybe in the future but right now we're all in online. Retail is not something we're talking about right now.

Q: Will you get it preloaded with PC hardware?

A: Possibly.

Q: Will it be part of the game suite included with Windows 8?

A: Probably not. We deal with those separately - that's an operating-system business, we're a game publisher.

Q: Will you be able to control the game with gestures, if you attach a Kinect sensor?

A: We're not talking about Kinect support at this time but who knows.

Q: It seems like the tradeoff you made - building richer, smaller locales to explore in the game - is the loss of the full, open world that could be explored in "Flight Simulator"?

A: The bet we've made is that to the non-hardcore simmer, flying the whole world isn't as interesting when there's nothing really interesting to see or do. I do get that for some segment of the audience that was one of the values - I can fly anywhere, into any airport, 25,000-odd airports was crazy.

But I think as you try to broaden and you want to bring in not the next million or two but the next 20 million or 30 million people, you say I will err on the side of more interesting area that's dense than the same amount of content spread all over the globe. There's a lot to do in Hawaii, and Hawaii is gorgeous.

Q: It seems inevitable that you'll have a mobile version someday?

A: We may do other stuff in the future but today we're just talking about the PC version of flight. I think Flight has legs. This is a franchise that's going to keep living for a lot of years. We're going to do that by exploiting all the opportunities that are coming at us, whether that's mobile, new operating systems, new hardware. There's a lot of stuff out there and I think Flight is going to be part of that at some point.

Q: I thought the ACES studio was fully shuttered back in 2009?

A: The reality was inside the company there were already efforts underway to bring that core expertise back together with a new mandate of how they could move forward.

Q: Will Flight make more money than Microsoft's "Gears of War"?

A: I think in the long-run, this franchise will definitely make more money than "Gears." I think Gears is a great. Flight is one of those evergreen franchises in entertainment - this will live another 30 years.

"Star Wars" fans will have to keep waiting for the Xbox Kinect game.

"Kinect Star Wars" was expected to be one of the big sellers this holiday season but Microsoft quietly decided to hold off releasing the title, apparently because its quality wasn't up to snuff.

The game was also a highlight of Microsoft's presence at the E3 game conference, where this photo was taken during the Xbox press event.

A Microsoft spokeswoman today confirmed the delay, which I found out about via Kotaku.

There's no word on when the game will ship. That also puts on hold the "Star Wars" themed Xbox 360 console and controllers that were revealed last month.

"We elected to move the launch date beyond holiday to ensure we're hitting the full potential of the title," said Breanna Wilson, at Xbox PR firm Edelman.

So it's being held for quality reasons?

"It's more just to deliver the best game possible," Wilson said.

The game isn't being canceled outright, she said.

A spokeswoman for LucasArts offered similar statements, saying "we remain committed" to making the best game possible.

Finally, an official Kinect air guitar game is here.

Microsoft today announced "Air Band," a downloadable game/tech demo for the Xbox 360 Kinect that tracks your hands as you play pretend instruments such as guitars, drums and keyboards. It looks like it will capture gestures, like swinging the axe, but not fingering.

The game is for one or two players, but it's less of a full-blown game than a gadget showcasing Kinect capabilities. It's being released through Microsoft's Kinect Fun Labs tech showcase and costs 240 Microsoft points, or about $3.

If you want to save the $3 and have the hardware and programming skills, here's a homebrew version written in C++ using openFrameworks and openCV for image processing that surfaced in December.

"Air Band" was teased during the opening session of Gamefest, a game developer conference that Microsoft is holding at the convention center in Seattle today and Tuesday, before the PAX game conference takes over the center on Friday.

A screenshot of "Air Band":

Ceton's going outside the box.

The family-run Kirkland hardware company today announced an external, plug-in version of its TV tuner for Windows PCs.

Called the InifiniTV 4 USB, the $299 gadget has four tuners that can simultaneously stream four live high-definition channels at once.

It's designed to work with Windows 7 PCs that include Media Center. It also accepts CableCard devices provided by cable companies.

The setup lets you replace cable company set-top boxes with a PC, which can stream the live and recorded TV around the home using "extender" devices such as an Xbox 360 console.

Pre-orders for the device begin Aug. 19 from a few online retailers. Broader available is expected in September, and shipping is planned to begin Sept. 19.

It looks like a cool device but buyers may think about waiting until shipping begins. Ceton's tuners are much appreciaed by Media Center enthusiasts but the company's initial production last year took than expected.

The company also announced today that the price of its internal quad tuners is now $299, down from $399 when they debuted in May 2010.

Nintendo today launched the 3D video service for its 3DS handheld game player, which went on sale in March.

Called "Nintendo Video," it provides free, downloadable short videos and movie trailers that can be viewed in 3-D without special glasses on the 3DS.

It follows the release last week of a Netflix app for the 3DS, and Nintendo Video in Europe and Japan.

Videos are downloaded to the device via Wi-Fi.

Content will include movie trailers, sports and action clips and music videos, including an exclusive from Ok Go coming July 27. Exclusive content will also be provided by CollegeHumor, Jason DeRulo, Foster the People and Blue Man Group.

Microsoft and Sony are making their game consoles into entertainment hubs with access to proprietary online video stores that rent and sell movies and TV shows.

Nintendo may be heading that direction, but it's not there yet with Nintendo Video.

When I asked Nintendo whether the 3DS video service will offer full-length TV shows or movies, a spokeswoman said the company "hasn't announced anything about full-length content."

Asked about the potential for Nintendo Video to become a store for movies or TV shows, the spokeswoman provided this response, which I think means 'not at this point':

Nintendo Video is a free, one-way delivery system. Once it is downloaded, videos sent by Nintendo update automatically, so there is no way for users to interface with the service beyond choosing which videos to play.

It seems likely that Nintendo Video will evolve and add more capabilities, especially after the company introduces the Wii U with 1080p output. The company's president, Satoru Iwata, told me in June that video services will work well with the upcoming console in part because of its ability to stream content to its portable controller screen.

Check out the Star Wars themed Xbox 360 console that Microsoft and LucasArts unveiled today at the Comic-Con convention in san Diego.

The console is designed to look like R2-D2, and it comes with a C-3PO controller. It also has a white Kinect sensor, which comes in a $449.99 bundle with the new Kinect Star Wars game and is now available for pre-orders.

Microsoft also revealed a new Podracing mode for the game that will be released in time for the upcoming holiday season.

Former Microsoft design guru and Xbox executive J Allard is backing a Portland-based company called The Clymb, whcih offers flash sales of outdoor gear.

Allard is among a group of investors providing $2 million worth of series A funding for the company, which began offering the "private sales" in 2009 and now has more than 1 million unique visitors per month and "several hundred thousand" members.

The Clymb's going to use the funding to expand its offerings, add social features such as a referral reward program, and begin offering local and global travel products.

Allard was chief technology officer of Microsoft's Entertainment and Devices divivision when he left in May 2010, reportedly after the "Courier" tablet project he was leading was spiked by Microsoft's senior leadership.

Now he's serving on The Clymb board as well as investing in the company. Other backers include the Oregon Angel Fund, Walden Venture Capital and other individual investors.

"This round of funding enables The Clymb to expand the team and innovate at a pace that matches our ambition," Allard said in a release.

A screenshot of the site:

Winners of the Game Critics Awards for products at E3 were just released.

The wild and stylish "BioShock Infinite" (shown here) won in four categories, including best of show and best original game. (It's rated M, by the way ...)

From a platform perspective, 14 winners are for the Xbox 360, 11 are for the PlayStation 3, 11 are for the PC and one is for Nintendo's Wii.

Seattle area game studios had one win - Microsoft's Turn 10 team's "Forza 4" was named best racing game.

Here's the list:

Best of Show
BioShock Infinite
(Irrational Games/2K Games for PC, PS3, Xbox 360)

Best Original Game
BioShock Infinite
(Irrational Games/2K Games for PC, PS3, Xbox 360)

Best Console Game
The Elder Scrolls V: Skyrim
(Bethesda Game Studios/Bethesda for PS3, Xbox 360)

Best Handheld Game
Sound Shapes
(Queasy Games/SCEA for PSVita)

Best PC Game
BioShock Infinite
(Irrational Games/2K Games for PC, PS3, Xbox 360)

Best Hardware
PlayStation Vita
(Sony Computer Entertainment)

Best Action Game
Battlefield 3
(DICE/EA Games for PC)

Best Action/Adventure Game
BioShock Infinite
(Irrational Games/2K Games for PC, PS3, Xbox 360)

Best Role Playing Game The Elder Scrolls V: Skyrim
(Bethesda Game Studios/Bethesda for PC, PS3, Xbox 360)

Best Fighting Game
Street Fighter X Tekken
(Capcom/Capcom for PS3, Xbox 360, PSVita)

Best Racing Game
Forza 4
(Turn 10 Studios/Microsoft Studios for Xbox 360)

Best Sports Game
FIFA Soccer 12
(EA Canada/EA Sports for PC, PS3, Xbox 360)

Best Strategy Game
From Dust
(Ubisoft Montpellier/Ubisoft for PC, PS3, Xbox 360)

Best Social/Casual Game Sound Shapes
(Queasy Games/SCEA for PSVita)

Best Motion Simulation Game
The Legend of Zelda: Skyward Sword
(Nintendo EAD/Nintendo for Wii)

Best Online Multiplayer
Battlefield 3
(DICE/EA Games for PC, PS3, Xbox 360)

Best Downloadable Game
Bastion
(Supergiant Games/WB Games for PC, Xbox 360)

Microsoft's next Xbox will be unveiled within a year, probably at next year's E3 conference in June 2012, according to a report at VideoGamer.com.

Citing a source at game developer Crytek, the report said Microsoft's gearing up to release its new console ahead of Sony's next PlayStation. The timing would also put the new Xbox on the market at roughly the same time Nintendo releases its Wii U.

From the report:

"The Crysis 2 developer says that Microsoft will announce the existence of a new Xbox within the next 12 months, hinting that an E3 2012 reveal is likely. Crytek believes that Microsoft will announce and launch its new machine ahead of rival Sony, though the developer is also investing resources into next-generation PlayStation development."

This follows a May report that said Microsoft had delivered an early version of the new console - a development box - to Electronic Arts.

Microsoft executives have said they intend to keep selling the Xbox 360 through 2015, and they characterized last year's arrival of the Kinect as essentially a new platform launch, though that doesn't rule out a new system being available before then.

Especially if Nintendo's Wii U starts attracting the hardcore gamers who are responsible for much of the 360's success.

A Microsoft spokesman declined to comment on "the rumors."

LOS ANGELES -- Here's Peter Molyneux, creative director of Microsoft's European game studios, explaining how "Fable: The Journey" was designed to use the Kinect sensor while sitting on the couch.

During a closed-door demo, he said it's easier to get immersed in the rich story when you're seated, as opposed to leaping and waving in front of the sensor.

Players explore the fantasy realm from a horse-drawn wagon, using arm gestures to control the reins.

Molyneux said the sensor's scanning capability will be used during emotional parts of the game that will be disclosed later. The game's scheduled for release in 2012.

A screenshot:

LOS ANGELES _ Microsoft will partner with regional cable companies to bring live TV onto the Xbox, a new feature that it announced Monday at E3.

That means the TV services will be provided through cable and satellite companies, and Xbox owners will need to subscribe to their services to get the live TV onto their game console.

That's according to Mike Delman, vice president of global marketing for Microsoft's interactive entertainment business group.

During an interview in Microsoft's elaborate, two-story booth at the show, Delman also talked about Skype on the Xbox, Kinect's new capabilities and how Xbox Live is going to become an entertainment service for Windows 8 PCs.

Here's an edited transcript of our conversation.

Q: Do you feel you've got as much at E3 as the other guys?

Definitely. We don't have an announcement like a new console but the combination of the games for the hardcore, starting to answer the question about the Kinect for the core, and having a lot more Kinect for broader audiences and the live television has played real well.

Q: Some of your announcements were just a tease, like live TV coming this fall to Xbox. Did you hold back details because partnerships aren't done yet?

We have partnerships in certain places. It's kind of ironic we have a lot of international partnerships before we got some of our U.S. partnerships done. The reason we talked about it is doing the platform work - doing voice, doing Bing search, getting the UI to be a modern UI, is really the hard work. Layering in the content isn't as hard, so it's a natural sequence.

Q: The interface seems designed to plug in another tile when you get a new content partner.

Yes, bringing in the live content - a lot of people are just layering in tonnage, they're not putting interactivity and discoverability in it. Getting the interactivity and discoverability built, so the content can sit on top of it - getting the platform work done is the hard part.

Q: Will live TV be universal, or will it be regional TV services provided by whoever your cable provider is?

It will be tied to either a satellite broadcast company or a cable company. So in international markets, you'll just have one provider. In the U.S., it will be bifurcated by region, by market. You'll be a Comcast guy (in Seattle), for example.

Q: So you'll have to be a Comcast subscriber, similar to the way you need a subscription to get the ESPN content on the Xbox now?

Yes.

Q: Will the Bing search be full Web search or just for entertainment?

It will be full search on what you have on Xbox Live. So anything that's available on Xbox Live if you're a gold subscriber it will search all of that, it won't go out and search the Web.

Q: Why not add Web search as well?

Listen, when we've got tens of millions of pieces of content just on our service, being able to search that - music for example, we've got 11 million music titles now - just mastering that in a bunch of different languages is a big priority. People at this point have other ways to get out to the Web.

Q: It seems like you could point the search at Bing's entertainment channel.

It's just not in the plans.

Q: Because you are using Bing, can you also serve ads against the results?

That's not part of the plan but it can be done. A lot of it will probably be serving ads within the content more than within search.

Q: It seems to be mostly about utility, making search easier than pecking out letters on the screen.

People will be doing stuff with their voice in probably a quarter the time it takes to go through the menu with the controller.

Q: With hardcore games, Kinect is still doing auxiliary things mostly, rather than controlling the main action. When are we going to see that?

People need time to build a core, triple a title from the ground up with Kinect. People are starting to build core games from the ground up. The core doesn't want the controller to come out of their hand, necessarily. ..In a way I think voice (with a controller in hand) will be as powerful or more powerful to the core than will gestures, and the gestures won't be the sweeping gestures you have in the broader Kinect. I think they'll be more pointed gestures like a head-fake or a head-butt. ... People are being very smart about doing something that will enhance the core experience rather than totally change it.

Q: So will "Halo 4" be a Kinect game?

I'm sure we'll have some Kinect in it but we're not that far along.

Q: We've seen voice and gesture controls but not much use of Kinect's scanning capability.

The scanning actually wasn't fully enabled until the "Fun Lab" stuff unveiled (Monday).

Q: I also wondered if scanning or the finger tracking you've shown here would need new hardware with better sensors.

No, you can actually do that stuff now. Some of the things that will be interesting in the next generation of sensor will maybe a more high-definition RGB camera so the video conferencing is better than it is now. Skype, if it comes to fruition - you can see a lot of possibilities.

Q: I was surprised we didn't hear about Skype in your E3 press conference, but I guess the deal hasn't closed yet ...

I'm probably out of bounds talking about it.

Q: Maybe you'll announce Skype on Xbox at CES in January?

Whenever it clears, there's a lot of possibility with that.

Q: Because there's a new Nintendo console that runs hardcore games coming, will people hold off buying an Xbox or adding Kinect to their console?

I don't know what the reaction's going to be relative to their own platform. All I know is we're in the fifth to sixth year of our platform and platforms have never grown in the fifth or sixth year at what we're seeing. Other platforms is not what we're focused on, we're focused on how do we make Kinect, how do we make Live as compelling as possible. In a way a lot of what's going to happen is the box doesn't become the focus going forward, it's what is the sensor, what is the handheld, what is the phone companion, what is the service companion and what are the experiences.

Q: Speaking of phone, I was surprised we didn't hear about connections between Xbox and Windows Phone here at E3.

Live has been successful on the Windows Phone, Live will be built into the PC; it will be the service where you get your entertainment. We were talking about it - you will not just see consoles and handhelds at this show next year, this show's going to morph into other devices.

Q: Will Xbox offer games on certified phones, similar to what Sony's PlayStation is doing with Android phones?

We think there's a lot of potential on the Windows phones. With the Nokia relationship, we're going to have a lot more distribution of phones and Live will be the primary entertainment service. I think that's going to be a good play for us. If we have that and the PCs to leverage, that will be a big Live base. It's our job to make 'buy a movie in one place and play it everywhere, buy a game in one place and play it everywhere.' Making things portable through the devices will be a big focus of ours.

Q: Will Microsoft's Zune service continue building up its video and music stores, or will you be working more with partners running content stores?

We're very committed to offering music and video and TV shows on our own service through Zune.

Q: I don't think I heard the "Z" word in the keynote. Are you phasing out the Zune brand?

In general I think what you're going to see is us talking about 'music' and 'video.' I think what we're coming to the realization about is putting brands on top of brands on top of brands is not as, you know - if you want to look for music, just knowing it's under a category (music) is a good thing.

Q: Speaking of branding, Xbox brands are all over Qwest Field. Are you going to go the next step and name the whole stadium, taking that over from CenturyLink?

Not that I know of. I'm a little worried we might own the whole city of Seattle if we keep doing sponsorships with everybody.

Q: How will your services and content be part of Windows 8?

There will be a lot of similarities in design and service philosophy. Whether it's us or Apple or anybody else, people want to be able to navigate through multiple devices in a certain ecosystem very seamlessly so we're committed to that.

Q: Will Xbox Live be your cloud media service that works with your Windows PC as well as your phone and Xbox?

Xbox Live will the pervasive media service across devices.

Q: Right now it's a little confusing - you've got Xbox Live, SkyDrive storage and other online places for media.

We have a ton of assets. Unifying the assets will be good for us and good for consumers.

Otto Berkes isn't the only Xbox founder starting something new.

Seamus Blackley, another one of the original four Xbox founders, is starting a new game development company in Los Angeles.

Blackley has been leading the games division of Creative Artists Agency, where he's been since 2003.

Variety broke the story Thursday that he's leaving to start his own company, and Blackely confirmed the move in an email last night.

Blackley's hiring at CAA "breathed considerable life into the 3-year-old division." From its report:

Since then, he's helped lock down lucrative deals for clients, including a groundbreaking pact for Shinji Mikami and Goichi Suda to independently finance games such as their upcoming "Shadows of the Damned" that resembles how indie films are funded. He also led the deal for "Rock Band"-developer Harmonix Music Systems' sale to Viacom.

Blackley left Microsoft in 2002 and co-founded a game financing venture called Capital Entertainment in Seattle before joining CAA.

Here's a clip of an interview with Blackley done five years ago for ACM, the Association for Computing Machinery:

It's the end of an era at Microsoft today.

Otto Berkes, the last of the original Xbox founders still at the company, submitted his resignation this afternoon.

Berkes went on to lead development of a new category of ultraportable, wireless touchscreen computers that Microsoft called Ultra Mobile PCs.

Among the prototypes Berkes built was a slate-like touchscreen computing device that Bill Gates showed at a 2005 conference in Seattle, years before there were even whispers about Apple's iPad. But the first generation of UltraMobile PCs were expensive, the hardware wasn't as advanced and Microsoft lost interest before the category blossomed.

"It's unfortunate you can't repeat that experiment," Berkes said, but he tried to cast it in positive light. "One of the outcomes of that effort was a change in thinking around Windows and the PC and touch interfaces and hardware evolution."

In a comeback effort, Berkes worked on the hardware and operating system of a prototype slate computing device code-named Courier that Microsoft brass scuttled in early 2010.

Berkes later was general manager for Microsoft's Chief Software Architect Ray Ozzie until Ozzie left last year. Most recently he's been working on Bing's datacenter hardware architecture.

Berkes is leaving for another company outside of the Seattle area but he wouldn't say which one. He did say the departure isn't because of frustration over projects or strategic choices by Microsoft and is instead about him trying something different after 18 years in Redmond.

"It's a good time for me to make a transition to a different set of challenges and something new and fresh," he said.

Still, his departure comes as Microsoft is struggling to catch up to consumer-market competitors that have been more willing to take and stick with big bets on emerging new categories.

The big question is whether Microsoft's current leadership can nurture and retain the rare kind of employee who can conceive of far-out new products, defend the ideas to fruition and ship the finished product.

Berkes had the most success when Bill Gates led the company, perhaps because they were similarly enthusiastic about the potential of new and transformative gadgets built on the next generations of computer hardware and software.

"Otto definitely did have tighter affinities with Bill," recalled Ted Hase, another one of the four original Xbox founders, who left the company in 2006 and now develops slot machines for a company in Las Vegas.

"There was an aspect of Bill where Bill stayed somewhat of a dreamer. In those dreams come those flashes and those sparks of creativity. And I think the company has lost that which is a sad day."

Hase said Berkes has "the combination of being able to actually see the bigger picture but also he is someone who has the courage and the strength to withstand all of the criticism and ridicule on behalf of that vision."

History will prove out the concepts Berkes fought for behind the scenes at Microsoft, Hase said.

"I think if anything, the successes of the other companies, the success of the competitors, the Apples, the Googles of the world, is somewhat of an affirmation that all of the early criticism Otto had taken was unfounded," he said. "In the end, Otto basically held truth in his hand."

Things turned out differently with the Xbox. But that began when Microsoft was at its apex and ferociously defending its position against challenges from companies such as Sun and Netscape.

Berkes and Hase were among a group of four who first pushed Microsoft to develop a Windows-based gaming system to compete with Sony's PlayStation 2, which was luring game companies from the Windows platform in the late 1990s. The other two were Seamus Blackley, who left in 2002, and Kevin Bachus, who left in 2001.

The soft-spoken Hungarian programmer led Windows graphics teams as the operating system rapidly evolved from Windows NT thorugh XP. He joined Microsoft in 1993 after developing a rendering system for Autodesk's AutoCAD for Windows.

In 1998, Berkes and his team ordered a few Dell laptops, took them apart and built the first prototypes of a Windows gaming console.

Ed Fries was leading Microsoft's games publishing business when the four Xbox founders pitched a "Direct X Box" based on the Windows DirectX graphics technology that was developed by Berkes' team.

"He was one of the crazy guys who came in my office one day with this idea of doing this thing, making this Direct X box," Fries recalled. "They talked me into joining up with them and helping to make it happen. It wouldn't have happened without him."

The Xbox business is now approaching $10 billion in yearly sales and last quarter its growth outpaced that of Windows.

Fries left Microsoft seven years ago but continues to work with its games business through ventures such as Airtight Games, a Redmond studio he co-founded.

He said the Xbox "was definitely the gamble and they stepped up and they did it."

But Fries doesn't believe Microsoft has lost that sort of innovative spirit, based on recent meetings he's had with employees.

"The impression I got is they're making some pretty big bets about the future," he said. "I don't think they've given up."

Berkes, 48, rode the waves up and down through it all but he was diplomatic today.

"No regrets, but it's time to move on for me," he said. "I'm very proud of what I was able to accomplish here."

The toys bundled into premium editions of video games are getting more outrageous.

This year's capper may be the Retro Lancer that's coming with pre-ordered bundles of "Gears of War 3" sold through Gamestop for $140 to $230.

"Gears 3" is a triple A action game coming to the Xbox 360 in September. More than 12 million copies of earlier versions were sold, making it one of the biggest franchises on the console.

Developer Epic Games today shared details of the Retro Lancer, which is made by Neca using Epic's 3-D data to create the weapon in the game.

The toy is 3.5 feet long and "hand painted with weathered and battle worn detail." It also makes a machine gun sound when you pull the trigger.

The Retro Lancer will also be sold direct, without the game, for $100 starting Sept. 13. Just in time for back-to-school shopping.

As modeled by Epic:

We've known since February that Verizon's first Windows Phone would likely be the HTC Trophy, a 1 gigahertz slab with a 3.8-inch touchscreen.

Today, the company's made it official and said the device will go on sale online May 26 and in stores June 2 for $150, after a $50 mail-in rebate and with a new two-year contract. Buyers will need a Verizon Wireless voice plan, starting at $40 per month, and a data plan starting at $30 per month.

This is despite Verizon brass pooh-poohing Microsoft's new phone platform, saying it's not as important as Apple, Android and RIM.

Microsoft, Verizon and HTC are putting more emphasis on the device's connections to Xbox Live. Buyers before July 15 get a free Xbox 360 game -- either "Halo Reach," "Kinect Sports" or "Lode Runner."

Specs include:

-- 1 GHz Snapdragon processor
-- WVGA 3.8-inch touchscreen
-- Surround sound through SRS WOW HD
-- 5-megapixel camera with autofocus and LED flash
-- 720p HD video capture
-- 16 GB on-board storage
-- Wi-Fi connectivity: 802.11 b/g/n

Microsoft buying Skype is like Seattle buying Italian streetcars.

On the surface, it seems like an outrageously expensive indulgence.

But if you can ignore the insane amount of money being thrown around and focus only on how it will help a few businesses, it makes some sense.

Microsoft already has powerful and widely used software for making phone and video calls and communicating over the Internet. Its messaging systems are among its crown jewels and used by far more people than Skype.

Similarly, Seattle is served by a vast and reliable bus system and is building up a light rail network.

But it still decided to spend $60 million - not counting priceless right-of-way - on streetcars that duplicate several bus routes. Sound Transit's going to spend another $132 million more more streetcar service.

Some people think the streetcars are neat, and they add flair and freshness to the mix of infrastructure in Seattle. But they'll never carry as many passengers as Metro and they'll probably never pay for themselves.

The trolley is largely an amenity, increasing the appeal of commercial property mostly owned by Paul Allen.

City leaders who took flak for this quasi subsidy may now feel vindicated by Allen's success redeveloping South Lake Union. The area along the trolley route has transformed into a vibrant, active neighorborhood anchored by Amazon.com's new headquarters.

You can't say the area blossomed because of the trolley but it helped.

With Skype, Microsoft now has a groovier, Web-native service that complements its established, industrial-strength communication systems.

Skype and particularly its video calling capabilities will be a focal point for the bundle of online services Microsoft will offer to consumers and businesses. Having one killer app in the bundle is enough to get people to enter Microsoft's online realm, or at least prevent them from logging into a competing suite of online services.

My guess is that Skype and video messaging will also be a cornerstone of Windows 8 or whatever the next version of Microsoft's flagship operating system is called. It's designed to work well on portable devices running the tiny processors used in smartphones, where video calling is coming to be expected as a standard feature.

Apple and Google have already developed video calling services for mobile devices and PCs but they don't yet have the critical mass of Skype. Microsoft has struggled to build a critical mass in search and now it has a head start as the next phase of online messaging is developed on fast, new 4G wireless networks.

Meanwhile Microsoft's going to use Skype to boost the appeal and reach of its Xbox, phone, Web mail and communication software products.

In its release, Microsoft noted that Skype has acquired the intellectual property powering its network. Perhaps that's a signal that Microsoft will assert its ownership of the patents, which could limit what competitors can do in the space or require them to send royalties to Redmond.

Skeptics expect Microsoft to fumble Skype somehow. To avoid this, Microsoft took the unusual step of creating an entirely new, autonomous group for Skype, giving the relatively small business organizational stature comparable to that of the massive Xbox, Office and Windows groups. Skype Chief Executive Tony Bates will be president of the Microsoft Skype Division, reporting to Steve Ballmer.

Microsoft actually has done pretty well with its messaging acquisitions. Key elements of Outlook were acquired, and it's now the most widely used email system in the world and an essential tool for most business PC users.

Microsoft also spent crazy money buying Hotmail in 1997 for around $400 million, when it was competing with AOL and Yahoo and was building out its suite of dotcom-era online services.

Microsoft's anxiety about falling behind Apple and Google no doubt led the company to overpay for Skype. But if the team in Redmond can avoid crashing their new trolley and it helps deliver a few big hits, the cost won't matter in the long run.

The next version of Microsoft's Xbox console is already being tested by an outside developer, although it's unlikely the system will be revealed to the public anytime soon, according to a new report.

Develop Magazine heard from a source that Electronic Arts received an early test version of the new console last month, so the game company can begin developing the first batch of games for the system.

It's really just an early build of the hardware components in a PC case and no details were provided about what's new to the system. The story said only that the new hardware "will feature enhanced support for Kinect with just a couple of alterations."

Microsoft executives have said they expect the current Xbox 360 to have a 10-year lifecycle, meaning it will be sold through 2015.

The Kinect motion sensor released last fall refreshed the console, boosting sales and extending its appeal midway through the cycle.

The news comes just before the E3 game conference in Los Angeles in early June, where Nintendo plans to reveal a replacement for the Wii. It's going to compete more directly with the Xbox and Sony's PlayStation by offering consumers -- and game developers -- full resolution graphics.

Today's leak may be intended to take some steam out of Nintendo's announcement.

It's no surprise that Microsoft is working on the next Xbox. It's probably even thinking about the one after that.

But it's the first hint that the Xbox 720 or whatever it will be called has gelled enough to be distributed outside of Redmond.

If EA and other big developers take three years to develop new games for the 720, perhaps the device will surface at the Consumer Electronics Show in 2014 and be on sale that holiday season.

Details are scarce, but Microsoft confirmed today that it's opening a new game studio a few hours north of Redmond, in Vancouver, B.C.

A spokesman told me via email that the studio will be focused on "games for core gamers" but wouldn't say much else.

A Gamasutra report suggested the studio was initially working social, microtransaction games, but will now build a triple A shooting game for Kinect, something that hasn't been done yet. Maybe it will produce the first Kinect-enabled Facebook action title.

Microsoft is advertising for 10 positions at the studio, including creative, technical and art directors, so it apparently doesn't yet have a huge team in place yet.

What's a little odd is that Microsoft already has another game studio in Vancouver.

In 2009 it bought BigPark, which was part-owned by Don Mattrick, the Vancouver native who is now president of Microsoft's interactive entertainment group. BigPark became part of Microsoft Game Studios and made "Kinect Joy Ride."

Microsoft also set up a big research and development center in Vancouver in 2007, with more than 250 people.

Microsoft hasn't said a lot about the new TV products and services it's developing this year, but the company has revealed the executive chosen to lead the effort.

Tom Gibbons, a vice president who had been working on mobile device strategy, is now leading the TV and service business within the Interactive Entertainment group.

The move comes as Microsoft is working with computer makers on a range of devices for connecting TVs to the Internet to stream TV and video services, building on the company's Media Center software that's being challenged by new products from Apple and Google.

Simulatenously, Microsoft is working on a range of video services for the Xbox platform, which has been offered in some countries as a modified cable box.

Gibbons has experience releasing gadgets and consumer products. Earlier he was VP of the specialized devices and applications group, leading strategy for groups that built Microsoft's automotive software, Surface computers, hardware and Macintosh software.

His new position was disclosed in a bio updated March 16 on Microsoft's press site, which was called out by Mary Jo Foley at ZDNet.

Microsoft's touting blowout sales of its Xbox 360 console.

The company sold 535,000 systems in February in the U.S. Microsoft said it was the best non-holiday month (meaning other than October, November or December) ever for the Xbox.

This beat even the crazy month in September 2007, when "Halo 3" was launched, NPD noted in its monthly report on U.S. game sales. This follows yesterday's disclosure that 10 million Kinects were sold since its November launch.

February seems like an odd month for a surge of Xbox sales. Group Manager David Dennis said there was pent-up demand after supplies ran low in December and January, and there was also a "viral effect" as people tried systems that others received in the holidays.

"As we kind of replenished stock back in February, people were still interestd in Kinect," he said.

A big seller last month was the 250 gigabyte Xbox system bundled a Kinect sensor (for $400), but Sony's PlayStation 3 and Nintendo's Wii also saw sales grow during the month, NPD said.

Altogether physical sales of video game products grew 4 percent during the month, to $1.33 billion.

The console business was up 12 percent, while the portable game player business fell 27 percent (perhaps because buyers are waiting for the Nintendo 3DS).

Hardware sales were up 10 percent, to $426.4 million, and accessories were up 22 percent to 210 million. Game sales - which doesn't include downloads - fell 8 percent.

"Call of Duty: Black Ops" continued to lead game sales, becoming the best-selling game in history, a spot previously held by Wii Play.

Total retail spending on the Xbox platform -- including hardware, software and accessories -- was $475 million in the month.

Nintendo issued a releasing saying that it sold 454,000 Wii consoles in February, pushing the total to more than 35 million sold in the U.S. since its launch.

Here are the top-selling games:

Microsoft today said it has now sold 10 million Kinect sensors since its November launch, plus more than 10 million standalone Kinect games.

That's at least $2 billion in revenue for the Xbox group, which perhaps justifies the outrageous Cirque du Soleil launch event held for Kinect last summer in Los Angeles.

Just in time for St. Patrick's Day, the company said it's also getting a spot in the new Guinness World Records 2011 Gamer's Edition.

Kinect is listed as the fastest-selling consumer electronics device, based on the pace of sales during its first three months on the market. From Nov. 4 to Jan. 3, the device sold an average of 133,333 units per day.

SAN FRANCISCO -- One of the most enthusiastic people at last week's Apple iPad 2 launch was Mark Rein, co-founder and vice president of Epic Games.

Epic, based in Cary, N.C., is known for full-bore, action blockbusters, such as "Gears of War" on the Xbox. Its "Unreal" game platform is also widely used by other studios to build games on multiple platforms.

Apple has highlighted Epic's work on "Infinity Blade," a high-definition fantasy title released in December for the iPhone and iPad.

Rein (left) said the iPad is on its way to becoming a game console, with the new version coming Friday having a dual-core processor, improved graphics system and a new accessory for connecting the device to a digital TV.

"For us, it's like Christmas," he said, when we talked at Apple's launch event.

Here's an edited excerpt of our conversation:

Q: I've heard a lot about the iPad being great for casual games. Will this power boost make it better for hard-core action games as well?

A: That's what "Infinity Blade" was -- the first core, triple-A game designed specifically for these environments. So we already think it is.

It means that now, even [with] the casual experiences, you'll be able to make those look even better. Even "Angry Birds" could take advantage of having more computing power.

Q: When will games appear that take advantage of the new iPad's increased power?

A: I don't think it will take very long. "Infinity Blade" (below) will already run faster and better because of this, and we can now turn up the texture detail and turn on some of the effects that we'd turned off on iPad because iPad was a more challenging development environment than iPhone, given the higher resolution screen.

An iPad has 20 percent more pixels on the screen than an iPhone 4, yet the CPU [central processing unit] and GPU [graphics processing unit] in the iPad were introduced before the iPhone 4, so the iPhone 4's more powerful and has more features.

Now this leapfrogs that again, and gives plenty of power to take advantage of the full resolution of the machine.

Q: If you bought the game for an iPad 1, then upgraded to an iPad 2, would you have to buy a new version of the game to get the improvements?

A: No, we will just adjust the game to take advantage of what it can do, the same way we adjust the game for iPhone 4 and 3GS. For us, it's just settings.

Q: Will game developers take advantage of the new HDMI adapter for displaying iPad content on a big TV screen? Could that make it more like a handheld console?

A: Yes, absolutely. I've been actually saying that since the first iPad came out: This is a great way to play games.

It's going to get more feasible -- your game console could be a tablet you walk around with, and you use it as a controller in your home game experience. Or eventually you'll put this down, you'll pick up a DualShock [game controller], this will talk wirelessly or through HDMI to your TV, and you'll play.

That's the future, and Apple has clearly made a big step toward that with their digital [AV] adapter.

Q: Does the iPad 2's processor have enough oomph for big-screen games?

A: I hate to say it, but there are game consoles you buy today that you connect to your TV that don't even hold a candle to this.

Q: Are you talking about the Nintendo Wii?

A: I didn't say a name. This is now more powerful than the first-generation Xbox. This is probably more powerful than a PlayStation 2 or a PlayStation 1 for sure. This is on the road to that, if it's not already.

You can set this down, connect it in and get like a PlayStation controller -- a controller that has Bluetooth -- and away you go. I'd love to see where we could use a controller and play the hard-core experiences on these because that would be great. Especially with a stand, you just stand the thing up and play.

You know, like Microsoft's Kinect -- there's a camera in here and some pretty good processing horsepower. You could make a "Dance Central" game for this thing. The possibilities are getting better and better every year.

Q: Are you going to release Epic's "Bulletstorm" on the iPad now?

A: Would "Bulletstorm" or "Gears of War" be on here? The IP [intellectual property] could be, but I don't think that we'd make that kind of dual-stick type game unless this thing spawned dual sticks -- you know what I mean?

It's just a different experience, what you do for this and what you do for a game console.

The really best experiences for [the iPad] are ones that are really designed for what you do on a touch screen.

But I play "Call of Duty" on it, I like shooters on it. It can be all things.

If you want to be super successful, you have to make the thing that people really want to play on this instead of a game console.

Q: So when will Epic open a Seattle office?

A: When we buy Microsoft.

You know times are tough when kidnappers will take a used Xbox.

That's what allegedly happened Sunday in Kingsport, Tenn., according to a police report posted by The Smoking Gun.

The report said a man kidnapped a 21-year-old employee who he believed had stolen rings from a job site, jeopardizing the man's business.

The initial demand was for $245 to cover the rings, but the 21-year-old didn't have the money and was allegedly getting roughed up while in captivity.

The captive's mother didn't have the money either, but her fiance "said he had an Xbox 360 that is worth $400 to $500," the police report states. The kidnapper accepted the deal, and traded the 21-year-old for the console at a Zoomerz convenience store.

There's not much information about the kidnapping victim, but that must be a pretty special Xbox. The top of the line 250-gigabyte model with a Kinect controller retails for $400.

The employer was charged with aggravated kidnapping.

A burst of sales in December wasn't enough to make 2010 a growth year for the video game industry, which saw sales fall 6 percent to $18.58 billion, according to NPD.

The biggest drop was in game hardware sales, which fell 13 percent compared to 2009, to $6.29 billion.

Apparently people are making do with their hardware, and just buying more games.

Game content sales - including retail packages plus mobile, rentals, social and downloaded games - were $15.4 to $15.6 billion - "flat to down by as much as 1 percent when compared to 2009," according to the firm's preliminary estimate of U.S. sales.

The top five games of the year were "Call of Duty: Black Ops," "Madden NFL '11," "Halo: Reach," "New Super Marios Bros." and "Red Dead Redemption."

PC games and packaged games at retail sold especially well, increasing 3 percent during the year. PC games rose 62 percent by dollar volume in December, pushed up by "World of Warcraft: Cataclysm" expansion pack. For the year, "Cataclysm" and "Starcraft II: Wings of Liberty" were the best-selling PC games.

Also gaining were sales of used games, downloads, mobile gaming apps and social network gaming, which offset declines in console and handheld gaming, NPD said in its release.

The console malaise didn't hurt Microsoft, apparently. The Redmond company crowed about the report, noting that Xbox 360 was the fastest-growing current-generation console in 2010, with 42 percent year-over-year growth.

December was also the best month ever for Xbox hadware sales, although Nintendo still sold more DS handhelds in the month, bringing total DS sales to more than 47 million in the U.S., NPD reported.

Nintendo said Wii sales are now over 34 million and the company has "strong momentum heading into 2011" with the 3DS going on sale in March.

"Nintendo has sold more game systems than anyone else for five years running," Charlie Scibetta, Nintendo of America's senior director of corporate communications, said in a release.

"Of the quarter billion hardware systems sold in the United States during the past 10 years, Nintendo sold more than half. We look forward to bringing fun new experiences to consumers when Nintendo 3DS launches in March."

Consumers spent $6.3 billion on the Xbox 360 platform last year, more than any other current-generation console, according to a selective preview of the NPD report that Microsoft issued earlier today.

Microsoft won't report last quarter's earnings until Jan. 27, but the company has been saying that 2010 was a blowout year for Xbox. Last week Chief Executive Steve Ballmer announced that 50 million Xbox 360 consoles have been sold and 8 million Kinect sensors were sold in its first 60 days on the market.

NPD said Kinect has been the best-selling game accessory since its launch in early November.

Microsoft's expecting the sales growth to continue in 2010.

"We expect to sell more consoles next year than we sold this year," said David Dennis, Xbox group product manager.

Dennis said the business is breaking the usual pattern, of releasing a console and then having sales taper off later in its life cycle.

"What you're seeing with our platform is something that hasn't been seen before, the mid-cycle acceleration," he said.

Here is the list of the top 10 games sold in the U.S. last year:

Here's a video, via the LA Times, of USC researchers using a hacked Kinect to play "World of Warcraft."

Boosted by the Xbox 360 Kinect launch, November broke a record for video game sales, with $2.99 billion worth of games and hardware sold in the U.S., according to NPD's monthly report.

The Xbox 360 platform accounted for 40 percent of the total industry sales during the month. Xbox accessories -- namely Kinect -- accounted for 60 percent of game accessory sales, the research firm reported.

Altogether game sales were up 9 percent in the month.

Full-year sales of physical games - which account for about 70 percent of game spending and don't include digitally disributed games and mobile apps - should reach $18.8 billion to $19.6 billion, NPD predicts.

"The higher end of that range would essentially be flat to last year. Gains in November offset a good portion of the year-to-date declines," NPD analyst Anita Frazier said in the release.

Nintendo announced that it sold more than 2.7 million game systems in the month - 1.2 million Wiis and 1.5 million DS handhelds per NPD.

"According to our internal numbers, Nintendo sold 600,000 Wii systems during Thanksgiving Week alone, an increase of 50,000 over 2009," Charlie Scibetta, Nintendo of America's senior director of communications, said in the release.

"Call of Duty: Black Ops" was the best-selling game with 8.4 million units sold. It accounted for 25 percent of all games sold in the U.S. last month. The top 10 games sold during the month:

Call of Duty: Black Ops (360, PS3, Wii, PC, NDS)
Assassin's Creed: Brotherhood (360, PS3)
Just Dance 2 (Wii)
Madden NFL 11 (360, PS3, Wii, PS2, PSP)
Fable III (360)
Donkey Kong Country Returns (Wii)
Need for Speed: Hot Pursuit (PS3, 360, Wii, PC)
Gran Turismo 5 (PS3)
NBA 2K11 (360, PS3, Wii, PS2, PSP,PC)
Wii Fit Plus (Wii)

NPD noted that it is now lumping multiplatform games together; if it was reporting titles individually by platform, "Halo: Reach" would have been tenth.

When games are ranked individually by platform, two Kinect titles almost made the top 10. "Dance Central" and "Kinect Sports" were number 11 and 12, according to David Dennis, Xbox group product manager.

"We're very happy with performance across all lines of our business," he said.

The federal case against a Los Angeles parking attendant who hacked an Xbox 360 console isn't going too well, according to a Wired report.

The judge "unleashed a 30-minute tirade" against the prosecution, criticizing potentially illegal acts by prosecution witnesses and faulty instructions proposed for the jury.

"I really don't understand what we're doing here," U.S. District Judge Philip Gutierrez said, according to the report.

Dazed prosecutors asked for a recess "to determine whether they would offer the defendant a deal, dismiss or move forward with the case that was slated to become the first jury trial of its type."

Among the rants: An Entertainment Software Association investigator secretly taped the defendant, Matthew Crippen, possibly violating California privacy law, and a Microsoft expert witness -- Ken McGrail -- admitted that he, too, had hacked Xbox consoles while in college.

Maybe Gutierrez is reflecting the softening stance the government and even Microsoft have taken toward copyright protections that limit what people can do with their technology products. In July the U.S. Copyright Office decided that it was legal for people to "jailbreak" their iPhones, and late last month, Microsoft backtracked on its opposition to hackers tinkering with its Kinect motion sensor.

A key issue is whether they're hacking the devices for illegal gain, or to make backups and customize their gear for personal use.

UPDATE: The prosecutors decided to dismiss the case against Crippen.

If you were wondering how Microsoft's Kinect sensor for the Xbox is doing, the company just issued another update saying sales have now passed 2.5 million units.

That's 100,000 per day since the $150 gadget launched on Nov. 4 in the U.S.

Don Mattrick, president of the interactive entertainment group at Microsoft, said in the release that Kinect is still on pace to sell 5 million units this holiday season.

This follows the Nov. 15 release, announcing that a million Kinects were sold in the first 10 days on the market.

There's still no word on Windows Phone 7 sales, or details of how many Kinect games are selling with the sensor.

ESPN service on the Xbox 360 may be just the start.

Microsoft is in talks with other networks about bringing additional subscription TV services to the Xbox and other devices, according to a Reuters report today based on anonymous sources.

Microsoft has tried for decades to increase its presence alongside the TV. That has led to all sorts of partnerships with networks and cable companies, including some that are now offering a modified version of the Xbox to subscribers as an alternative cable box.

Meanwhile consumer-electronics companies from Apple down are offering a range of new gadgets that connect TVs to the Internet and provide a platform for TV and movie companies to offer rentals and subscription services.

An excerpt from the Reuters story:

The maker of the Windows operating system has proposed a range of possibilities in these early talks including creating a "virtual cable operator" delivered over the Internet for which users pay a monthly fee.

Other options include using the Xbox to authenticate existing cable subscribers to watch shows with enhanced interactivity similar to how pay TV operators have sought to do over the Web, said these people.

Microsoft has already been building up the lineup of entertainment options on the Xbox, which is becoming more of an entertainment hub and an option for people trying to get Internet video content onto their TV.

I'll bet the latest round of talks are focused particularly on new digital TV boxes based on Windows Media Center that Microsoft and hardware companies will unveil at January's Consumer Electronics Show. These $200 to $250 boxes function as TV tuners and gateways to online video services such as Netflix.

Steve Jobs finally landed the Fab Four, and now Microsoft may get the Bizarre 200. Or some of them, perhaps.

Gaming mag Develop is reporting that Microsoft has expressed interest in acquiring Liverpool, England, game studio Bizarre Creations. Or it may just be interested in picking up some of its 200 employees, who are being sacked by parent company Activision.

Bizarre created one of the early hits for the Xbox, the "Project Gotham Racing" franchise. This image is from PGR4, which was released in 2007 and gave players ultra-realistic road racing mixed with classics like sliding around Nurburgring in a Maserati 250F.

But its most recent title, "Blur," wasn't much of a success and news surfaced Tuesday that Activision was closing the studio.

A Bizarre source told Develop that the situation was looking up after a staff meeting today, when word of possible new owners emerged.

"Microsoft aren't stupid," the source told Develop, "They know we're talented and have spoken to Activision about us."

Xbox spokesman David Dennis declined to comment, saying the company won't comment on "rumors."

Microsoft's Kinect is connecting at the cash register. The company today said that it sold 1 million of the $150 controllers for the Xbox in its first 10 days on the market.

This follows news from England that the arrival of Kinect and "Call of Duty: Black Ops" last week combined to give game sellers in the United Kingdom their highest grossing week of all time.

With Black Friday and the real holiday selling season still to come, Microsoft is now suggesting it may beat its goal. Earlier this month it upped the forecast from 3 million to 5 million by year's end. Now it's talking about selling more than 5 million.

In today's announcement, Don Mattrick, president of the Interactive Entertainment Business, said the company is going to "keep pace with high demand and deliver against our plan to sell more than 5 million Kinect sensors worldwide by the end of this year."

Kinect went on sale in the U.S. on Nov. 4 and in Europe Nov. 10. It launches in Asia next week. Microsoft expects the system to be available through 60,000 retailers in 38 countries by the holidays. (Here's my Kinect review.)

Now it's time for Microsoft to tell us how many Windows Phone 7 devices were sold in its launch week.

I hate having to write about this sort of thing, but some people are clinging to the debunked story that Microsoft's Kinect doesn't recognize black people.

Pack journalists and blogs gleefully jumped on the non-story, rushing to report a racial issue where there isn't one. It's all about clicks, right?

The story began when GameSpot.com posted an item Wednesday saying one of its "dark-skinned" employees was recognized "inconsistently" by Kinect and it was unable to "properly identify the other despite repeated calibration attempts."

"However, Kinect had no problems identifying a third dark-skinned GameSpot employee, recognizing his face after a single calibration. Lighter-skinned employees were also consistently picked up on the first try," the site reported.

Remember, Kinect is basically a really fancy camera that constantly shoots and analyzes images of players.

This gets to two obvious facts that are being spun and woven into a huge, raggedy shroud obscuring what's really happening.

Fact one: When you take pictures of people, you get different results depending on lighting conditions and skin tones. Sometimes it's trickier than others.

Fact two: Kinect is sensitive to lighting conditions and not absolutely precise.

Fortunately, Kinect primarily relies on skeletal tracking to play games and for most of its controls. It tracks 48 points on the skeleton. It doesn't matter what color your skin is -- as long as you have a skeleton that moves, you'll be able to play the games.

After the GameSpot story appeared, it was quickly debunked by Consumer Reports.

Unlike GameSpot, Consumer Reports explained its testing and posted a video of testing with black and white players.

The magazine noted that Kinect is affected by light levels and advised people to provide plenty of light in the room where it's used.

Consumer Reports said lighting conditions also affected the performance of an HP webcam that caused a similar stir. From its report:

The log-in problem is related to low-level lighting and not directly to players' skin color. Like the HP webcam, the Kinect camera needs enough light and contrast to determine features in a person's face before it can perform software recognition and log someone into the game console automatically.

Essentially, the Kinect recognized both players at light levels typically used in living rooms at night and failed to recognize both players when the lights were turned down lower. So far, we did not experience any instance where one player was recognized and the other wasn't under the same lighting conditions.

This problem didn't prevent anyone who was affected from playing Kinect games, since it can "see" and track players' bodies and motions using a built-in infrared lighting system.

Consumer Reports isn't the only media outlet that didn't see a racial issue with Kinect.

Oprah raved about the system on her show a few weeks ago, and the New York Times' Seth Schiesel gave Kinect a glowing review, even though it sometimes takes a few tries to activate a control.

"Does the system recognize every voice command exactly the first time? Of course not. But it works consistently enough that I never wanted to reach for those relics of the past: a plastic controller or remote control," wrote Schiesel, who is black.

Microsoft finally weighed in with a response to GameSpot:

"Kinect works with people of all skin tones. And just like a camera, optimal lighting is best. Anyone experiencing issues with facial recognition should adjust their lighting settings, as instructed in the Kinect Tuner."

Microsoft could also reassure people that they can get their money back if the system doesn't work for them.

The situation highlights the varying performance of Kinect's facial recognition system. It missed me a few times in late afternoon when the light changed in my living room. The system advises you to rescan your face at different times of day to optimize its recognition, but I didn't bother.

Sometimes it takes a lot of waving to get Kinect's attention, and it can lose track of small children moving too much around the room.

Kinect works well enough to play new games and give you a taste of the future. But it's definitely going to be awhile before this sort of technology is ready for cash registers and airport security systems.

Fortunately, Kinect's not doing anything critical just yet. It's letting you pet digital cats, jump on virtual rafts and throw pretend bowling balls while the technology matures.

Maybe the flap is a mark of success: Kinect is already making it harder for people to tell the difference between reality and make believe.

After the outcry caused by its story, GameSpot did more testing in different rooms and with the players wearing different clothes.

Guess what happened? Kinect correctly identified the same "dark-skinned" players on the first try.

But Kinect hiccuped when one changed to a black shirt from a blue shirt. A fourth employee with dark skin brought in for testing wasn't recognized.

From Gamespot's update:

At first, the two employees who originally would not be recognized by the camera were correctly identified on the first try. However, when one changed from a light blue shirt to a black shirt (but stayed in the same room with the same lighting), the camera again failed to recognize him after multiple calibration tests. It also failed to recognize another darker-skinned GameSpot employee after four calibration attempts.

Bottom line, some Kinect users may be frustrated by its performance but there is no consistent effect attributable to race.

Kinect isn't insensitive. The problem is that it's overly sensitive and a little touchy. How Seattle can it get?

Today's column in the paper is a review of Microsoft's Kinect. It follows a Monday story focused on project lead Alex Kipman, the Brazilian who code-named the system Project Natal after the city where he used to spend summers.

(The stories were staggered in part because Microsoft, as part of its hyper structured launch program, wouldn't provide test gear to news organizations unless they promised to hold reviews until 9 p.m. Wednesday or midnight eastern time, when the consoles first went on sale. Oprah and Ellen didn't count.)

The review, with some photos added:

Sometimes the intense sights and sounds of modern video games stay with you, like scenes from a great movie.

After you're done hopping and waving in front of the TV screen, long-forgotten muscles will remind you of the fun you had with the $150 gadget.

Check out the three-story Kinect countdown clock in Microsoft's Studio A building.

Just in case anyone there can't remember when the Xbox 360 motion controller goes on sale. (bonus puzzle: when was this picture taken?)

Get ready for a new Web phenom.

That would be Kevin WK, a Chicago musician whose enthusiastic, nearly naked unboxing of "Fallout: New Vegas" for the Xbox 360 is making him a YouTube star.

Microsoft ought to set this guy up with a Kinect for "Live-casting."

If you think it's going to cost you a lot to retire, consider what it cost Robbie Bach, the outgoing president of Microsoft's entertainment and devices business and head of its Xbox business.

Bach announced in May that he was retiring this fall, but his retirement date is technically Dec. 31, according to Microsoft's new proxy statement.

In his last fiscal year at Microsoft, Bach set records for the business - $8.1 billion in revenue and $679 million in operating income - and was awarded 100 percent of his performance bonus. That's despite struggles of Microsoft's phone business, which was also under his watch.

(Steve Ballmer also received 100 percent of his incentive award)

Bach's bonus was $1.4 million, plus stock awards worth $5.6 million. That's on top of a $645,000 base salary.

But because he's retiring, Microsoft's only giving him 25 percent of his stock award this year - $1.4 million.

In other words, Bach had to give up stock worth $4.2 million to retire.

Still, it doesn't sound like he'll have to become a greeter at Wal-Mart or sling burgers at McDonald's in his golden years.

Stephen Elop, who left the top spot in Microsoft's business software group on Sept. 10 to lead Nokia, is also giving up a few bucks for his move to Finland.

Elop was awarded a performance bonus of $6.72 million - 96 percent of his target - but most of it's staying in Redmond.

He's giving up $5.38 million of it - the portion given in stock. He's also giving up about half of the $1.34 million cash portion "due to the repayment of a portion of his July 2008 signing bonus," Microsoft's proxy said.

Presumably Nokia's going to help him out.

Here are all of the salaries and bonuses for Microsoft's top execs, as listed in the proxy (click for a bigger image):

Here's another way to level the playing field with China, besides getting the country to stop manipulating its currency:

Get Microsoft to start selling Xbox 360 consoles in the country, pre-loaded with "Halo: Reach."

In the six days after "Reach" launched last week, players spent 5,901 man years playing the game online, according to "Halo" creator Bungie.

That doesn't include the millions of hours people spent playing the game's campaign offline, and the hours (or days?) of reduced productivity at work the following mornings.

Bungie also reported yesterday that more than 70 million online "Reach" games have been played. The game's online population surpassed that of "Halo 3," beating its all time record of concurrent players by 65 percent.

Bungie's stats were a sort of rebuttal to the Xbox Live weekly play report that showed "Call of Duty: Modern Warfare 2" still had more unique users on the service the week of Sept. 13-19, but "Reach" wasn't available the full week.

Xbox's Larry Hryb - who caused a kerfluffle when the numbers came out this week with an error - yesterday afternoon provided an update, saying that "Reach" was the top game on Xbox Live for the past seven days with nearly four times the unique users as "Halo 3" had the week of Sept. 13.

China banned the sale of the Xbox 360 and other consoles, fearing they will waste the minds of its youth, who instead are avid players of online PC games and gray market consoles.

But that's not stopping Chinese computer giant Lenovo from developing an Xbox Kinect knock off called the eBox for its home market.

Maybe it's time for Bungie to show the WTO how to set up a Banhammer anti-cheating system. One reason the hammer comes down: "Manipulating network conditions to give yourself an advantage, or to the detriment of the experience for other players."

Microsoft tonight announced that "Halo: Reach" sales grossed $200 million in its first day, making it the best-selling game in the company's history.

"'Halo: Reach' is the biggest game Microsoft has ever released and its launch has already surpassed every game, movie and entertainment launch this year," Phil Spencer, vice president of Microsoft Game Studios, said in the release.

The total includes U.S. and European sales. For comparison, "Halo 3" sold $170 million in the U.S. alone on its first day in 2007.

It is an amazing number for Reach, especially ahead of the holidays and during a down economy.

But bragging rights may only last until Activision releases "Call of Duty: Black Ops" in November for the Xbox 360 - plus the PlayStation 3 and Wii. The last version in 2009 sold $310 million in its debut on multiple platforms in the U.S. and U.K. I wonder how Reach would have done if it wasn't an Xbox exclusive.

If you love action video games with sci-fi themes, "Halo: Reach" may be the highlight of 2010.

It may also be a highlight for Microsoft, which is counting on huge sales of the flagship game for its Xbox 360 console.

The launch of "Reach" at 12:01 a.m. Tuesday marks the start of an ultracompetitive holiday season with a series of blockbusters coming to Sony's PlayStation 3 and Nintendo's Wii.

"Reach" sets a high bar. It's a thrilling and occasionally breathtaking update of the flagship game for Microsoft's Xbox console, with new characters, guns, vehicles and tools to build and share custom games online.

The game is also bittersweet for fans of the hit series that Bellevue-based developer Bungie first released in 2001.

It's a lovingly crafted prequel that clears up any lingering confusion about the "Halo" story and the franchise's artistic and technical ambitions before Bungie moves on to other projects.

Bungie stuffed "Reach" with new features and details. The landscape and design are brighter and crisper than previous versions, - memorable scenes include earthward views from a launching rocket, and twilight views across miles of open country -- but the story is progressively darker, reflecting the grimness of today's wars.

Critics for the most part are raving. Fans began lining up Sunday outside the main launch event in New York. In Seattle, the crowd formed Monday afternoon for the evening launch party at the Experience Music Project.

Here are a few numbers to put the tonight's launch of "Halo: Reach" into perspective.

For tonight's launch of "Halo: Reach," Microsoft brought heavily armed Spartan soldiers to London, including one who flew over Trafalgar Square with a jetpack.

I wonder if they'll borrow a space fighter jet from Boeing to fly over the Experience Music Project at tonight's launch event, which begins at 6 p.m.

Here's a video of the London event; skip to the 2 minute point to go directly to the jetpack.

Sony on Thursday called out the 15th anniversary of the PlayStation, which will be marked by a series of promotions on the PlayStation Network.

It comes as Sony is about to launch the Move motion control system for the PlayStation 3, setting up a holiday sales battle with Microsoft's upcoming Kinect system for the Xbox 360.

Sony said it sold more than 377 million PlayStation consoles and more than 2 billion software units since the line debuted in 1995. In the U.S., PlayStation sales are more than $63 billion over the last 15 years, or about 40 percent of the overall video game market during that period, the company said in its release.

Peter Dille, senior vice president of marketing at Sony Computer Entertainment America, shared a few thoughts on the PlayStation's milestone and competition before getting his slice of cake.

Here are edited selections of the conversation:

Interesting sales statistics in the anniversary news release ...

"Another stat that jumps off the page -- when we got involved, the business was $2.5 billion; now it's close to $20 billion. It's amazing the growth we've seen. We'd like to think we've had a share in driving that growth."

How are you feeling about the Move vs. Kinect competition this holiday season, especially now that you've seen Microsoft's Kinect in action?

"Our perspective has become much more bullish as we get closer to launch. We've had a chance to get people playing our system ... The feedback we've gotten has been unanimous and tremendous. It's, 'I see what you mean about this precision thing.' Our pre-orders continually are ramping up with consumers, retailers want to get more product."

Do you expect a supply crunch with Move hardware?

"We're hopeful that it's a hot product. Based on the retailer feedback, they'd like to get more than they have at this point. That's a high-class problem to have."

What's going to be the biggest Move title?

"The title that we feel really represents the great spectrum of experiences is Sports Champions." [The game comes with the $100 Move starter bundle.]

Does this talk about the PlayStation brand signal more products coming soon -- maybe a new mobile device?

"No new mobile launches this year."

Will you be extending the brand to other company's hardware that runs PlayStation games?

"Our strategy is to maintain the PlayStation brand on Sony devices and provide experiences that are exclusive and proprietary."

How concerned are you about launching Move in the current economy? Will people be able to afford it?

"Every marketer in the country should be concerned and is conscious of the economy we're living in. Having said that, we know many families might have had to forgo the big expensive vacation; you may not put a second addition on the house, But what we also know is families are looking for value."

Are you going to promote it differently to reach more casual players?

"We'll be buying different media and showing up on programming you might not have seen."

Will you spend more this holiday season on marketing?

"Close to last year, but the mix is different."

Are you going to spend more promoting Move than Microsoft spends on Kinect?

"I don't think we'll ever outspend Microsoft."

How is the premium PlayStation Plus network doing?

"It's right in line with our expectations."

Any plans for more hardware price cuts this season?

"We're pretty comfortable with $299. We feel like it's a true sweet spot. Since we announced that last year, we've been challenged to keep the PlayStation in stock."

The PS3 seems to have turned the corner. Will Sony now start investing more in game development and maybe buying more studios?

"You can't buy a new studio every week."

How are you going to celebrate the PlayStation anniversary internally?

"Several big cakes. It's hard to make cake for 1,800 people."

Apparently kids bought school supplies instead of video games last month.

Or maybe they were saving money for "Halo: Reach" and other blockbusters coming soon.

The industry saw its worst August since 2006, with sales down 10 percent to $819 million, according to NPD's monthly report. Hardware sales were down 5 percent and software sales were down 14 percent.

Among the consoles that did sell, Xbox led the pack, with 356,700 units sold in the U.S. last month. Sony's PlayStation 3 sold 226,000 units and Nintendo sold 244,300 Wiis and 342,700 DS handhelds.

"Madden NFL 11" was the top-selling game, with the Xbox version taking first place and the PS3 version taking second. "Super Mario Galaxy 2" was third, followed by "Mafia II."

NPD analyst Anita Frazier expects 2010 sales will reach $18.6 billion to $20 billion, with a late boost from "Reach" and the new motion-control systems coming to the Xbox and PS3.

She noted in the release that the Wii had its softest month since its debut, while the Xbox and PS3 posted year-over-year gains. Xbox sales were down from July, though.

"That said, with 'Halo: Reach' coming to market next week, if hardware sales react in a similar fashion to what was experienced when 'Halo 3' was launched in September 2007, September could be a huge sales month for Xbox 360 hardware," she said in the release.

Frazier noted that there are about three times as many Xbox 360s compared with the launch of "Halo 3" "so the potential audience for 'Reach' is significantly larger."

"Between the size of the potential audience, the quality of the game previews, and the hefty marketing program behind the game, we can expect big numbers to be reported with September results," she said.

The Entertainment Software Association will honor Robbie Bach, the retiring president of Microsoft's entertainment and devices business and supreme Xbox commander, during an Oct. 20 event in San Francisco.

Bach is being honored "for his steadfast and long-term commitment to improving the lives of America's children," the ESA said in its release, noting Bach's charitable work. The Medina resident is chairman of the Boys & Girls Clubs of America national governing board and led the creation of Get Game Smart, an educational campaign aimed at families.

The ESA will present its "Champion Honoree" award to Bach during the group's annual charity dinner and auction. Previous winners include George Lucas; Nintendo's Shigeru Miyamoto and Howard Lincoln; Electronic Arts' Bing Gordon and Sony Computer Entertainment's Ken Kutaragi.

Tickets are $750.

If you still haven't bought your back-to-school PC, here's an awesome option -- if you have no intention of studying and just won the lottery.

It's the Origin Big O, a liquid-cooled behemoth that has one of the new Xbox 360 "Slim" consoles stuffed inside.

Maybe this is what Microsoft needs to really get PC gaming fired up again.

In this picture you can just see the Xbox drive try on the lower right.

The starting configuration has an Intel Core i7 930 processor overclocked to 4.0 GHz, dual Nvidia GTX 480 graphics cards, six gigabytes of DDR3 1600 Mhz RAM, dual solid-state drives and a 1,500-watt power supply. All for $7,669.

That's with Windows 7 Home Premium 64 bit and a one-year warranty.

The upgrade model -- with Windows 7 Ultimate and a three-year warranty -- has dual Intel Xeon X5680 processors overclocked to 4.3 GHz, plus four GTX 480 cards, 12 gigs of 2000 Mhz RAM and dual 1 kilowatt power supplies.

Miami-based Origin built the Xeon beast for CPU Magazine's annual "Dream Machine" feature, but it can be had for $16,999. Insert your own Bill Gates joke here.

To get the Xbox consoles into the cases, Origin takes them apart, re-arranges the components inside and connects them to the liquid-cooling systems. A spokesman said, "They strategically mod it and rearrange the components and ports for optimal usage within the PC."

Origin designed the systems so you can play games on the 360 "while your computer is busy dominating whatever other task it is assigned."

I wonder if Cray could squeeze a 360 inside its Windows 7 Xeon box, the $35,449.99 CX1-iWS. It runs the same 24-core Xeon 5600 processors as the upper-end Big O. Could they at least get a Wii in there, so the scientists have something to do while they're running simulations of the weather or nuclear explosions?

Microsoft chose the huge Gamescom conference in Cologne, Germany, to unveil the first batch of Xbox Live games that will be available for Windows Phone 7 devices when they go on sale this holiday season.

The company also confirmed that it's building up a mobile games studio in Redmond dedicated to the Windows Phone platform.

As Microsoft takes on the iPhone and Android juggernauts this holiday season, a key weapon is going to be its Xbox business, including games, relationships with developers, game-building tools and the Xbox Live network.

Meanwhile, Apple has been pushing hard to raise the profile of games on the iPhone and iPad, and Google has been investing in mobile game companies as it grows its Android platform.

Leaders of Microsoft's new mobile studio wouldn't say whether the company is going to start buying or backing mobile game developers. But they did say Microsoft is developing new games internally to showcase the technical capabilities of the Windows Phone platform.

The overall effort is similar to the buildup of Microsoft Game Studios prior to the Xbox console debut, according to Matt Booty, the former chief executive of Midway Games, who was hired in March to start building a mobile studio.

An Xbox Live tile has been shown on the home screen of Windows Phone 7 devices since Microsoft rolled out the platform in February, but until now the company hasn't detailed specific games. Word of the special mobile studio just surfaced last week in job postings.

Today, it's announcing more than 50 games that will be available for the phone at launch. They include a few mobile counterparts of console games such as "Assasins Creed" and "Guitar Hero 5," plus some familiar titles such as "Bejeweled" and "Frogger." The company wouldn't say yet how much the games will cost or whether any will be preloaded on the phones.

There will be two categories of games for Windows Phone. One includes games that connect with Xbox Live, using the online service's achievement system and networking features. Those games will go through extra review by Microsoft, which will publish them.

Games without Xbox Live will also be available through the Windows Phone app marketplace.

During a demo in Seattle last week, a standout was a "Crackdown 2: Project Sunburst" from Microsoft Game Studios.

It's a simple tower defense game in which you use cannons mounted on a building to repel attackers.

The twist is that you can set the cannons up on any building captured by Bing's satellite imagery. You can pretend to be defending the Space Needle, the White House, Qwest Field or even your house, so you'll be blasting attackers marching up your street.

At left is a screenshot showing the game overlaid on the conference center in Cologne.

A player's Xbox Live avatar gets special treatment on the phone. The animated, cartoonish character waves and peeks out through the Xbox Live tile on the phone's display, like a sprite inside the device.

Tapping on the tile, an avatar can be enlarged to fill the screen and poked and manipulated with the touchscreen. It can also activate applications. Instead of launching a flashlight application, for instance, you can choose a flashlight from a list of gadgets available to the avatar, which then picks up the light and shines it outward.

Microsoft's new mobile studio will create some original games. But much of its effort will be working with game developers inside and outside of Microsoft, to get their titles onto the Windows Phone platform.

Booty wouldn't say how big the mobile studio will become, but he said Microsoft is making a major commitment to the group and "we've got huge resources."

Still being worked out is the path game developers might take with a game developed for Windows Phone and then extended to upcoming Windows tablets. On slates or tablets, Windows is the primary platform and it has extensive resources for developers, Booty said.

"We want the developer to have a number of avenues to expose their content," he said.

Here's the list of Xbox Live games available at launch:

Microsoft is crowing over the monthly NPD report on U.S. video-game sales, which show a 118 percent jump in Xbox console sales during July.

That was the most dramatic gain in a month when overall game sales were down 1 percent, to $846.5 million. July's usually relatively slow but hardware sales were 12 percent higher than July 2009, while game software sales were down 8 percent.

Microsoft sold 443,500 consoles, more than double sales in July 2009.

"It's a great position to be in and this isn't really even our busy season," Xbox spokesman David Dennis said.

Xbox also beat July sales of Nintendo's Wii (253,900), Sony's PlayStation 3 (214,500) and even Nintendo's DS (398,400).

But don't read it as a new trend. The Xbox sales were helped by a launch bounce that may not happen again until the Kinect goes on sale in November.

Xbox sales in July were boosted by the release of the new slimmer and quieter model (shown, with Kinect). Retailers also slashed the price of the previous consoles, which could be had for under $150 during July.

Sony had the same launch effect last September, when PS3 sales doubled after a $100 price cut and the release of a slimmer model. The company sold 491,800 units that month.

Microsoft also cleaned up in the game accessory category, where the 1600 point Xbox Live card was the best-selling accessory for the fifth month running.

Another bright spot for the month was PC games, which rode the success of "Starcraft II" to a 103 percent gain, dollar-wise.

Apparently anticipating Microsoft's shining in the closely watched NPD report, Nintendo on Tuesday talked up Wii sales. It said 30 million units have been sold in the U.S. since its launch in November 2006.

Nintendo said that "further establishes Wii as the fastest-selling console in the history of the industry, reaching this milestone 15 months faster than the next best-selling console."

Sony also issued a statement today on the NPD report, noting that PS3 console sales have posted monthly sale gains for 12 consecutive months. They're up 76 percent since July 2009 and 45 percent year-to-date in the U.S.

Here are the top 10 games for the month:

NCAA FOOTBALL 11 - 360
NCAA FOOTBALL 11 - PS3
CRACKDOWN 2 - 360
SUPER MARIO GALAXY 2 - WII
LEGO HARRY POTTER: YEARS 1-4 - NDS
RED DEAD REDEMPTION - 360
LEGO HARRY POTTER: YEARS 1-4 - WII
DRAGON QUEST IX: SENTINELS OF THE STARRY SKIES - NDS
NEW SUPER MARIO BROS. WII - WII
CALL OF DUTY: MODERN WARFARE 2 - 360

Here are new screenshots of "Halo: Reach" that we couldn't fit in the paper with today's story on the game, plus a link to a trailer video.(This will be my last Halo post for a little while ...)

Forking around:

Shooting from the sky:

Shooting in the sky:

Vehicles like the Warthog have more detail:

A cinematic shot of the squad - more "real" soldiers this time:

The Banshee:

The Pelican:

It's a blast:

Here are excerpts from my interview with Bungie's Marcus Lehto, "Halo Reach" creative director, that led to today's story on the game coming out Sept. 14.

Q: You've got more women in the game. Was that a business decision to reflect the market, or influenced by developers with female players in their families?

A: We always want to be sure we're trying to be as inclusive as possible with players. That's one of the reasons in player customization you can choose a real female Spartan now, and choose a real female voice to go with her, and kit her out just like you would male Spartans. You can do some really neat stuff there, and it's really cool too, because contextually all the characters speak to you appropriately then with regards to your gender, in cinematics and also in gameplay itself.

Q: That's new - to have gender-appropriate cinematics even?

A: Yes, that's something I really pushed for on this project. I wanted to make sure both male and female were treated equally as far as player character was concerned and you could really open up the audience, hopefully, to a broader group of folks.

Q: When you make a decision like that, how much is driven by business and marketing decisions about getting X more players?

Nintendo's Wii gave Microsoft its initial inspiration to give the Xbox motion control capabilities that ultimately became the Kinect system.

That's according to a brief history of the project that Craig Mundie, chief research and strategy officer, told at the company's financial analyst meeting this morning.

Mundie said the project drawing heavily on advanced research began about four years ago, when Microsoft was battling with Sony for the hearts of hard-core gamers. Nintendo's Wii showed that there was "another demographic and a different class of applications" for gaming, he said.

"It certainly showed that there was a market expansion opportunity in the gaming business if we were able to do something completely different," he said.

Rather than imitate the Wii, Microsoft decided to take it further and develop a controller-free system. At first it seemed impossible, but "we went from impossible to shipping in about three years," he said.

The Kinect, which goes on sale this fall for $149, also offers a glimpse of tomorrow's computer interfaces, Mundie said:

"It does portend a revolution in the way people will interact with computers."

Following Mundie's presentation, the 180 or so Wall Street analysts were given a chance to try Kinect in a "technology showcase" that's part of the event.

Sales of video game software in the U.S. fell 15 percent to $531 million last month, according to the monthly NPD report.

But that was offset partly by sales of game consoles, including big gains for Microsoft's Xbox 360 and Sony's PlayStation 3. Game hardware sales were up 5 percent to $402 million. The number of console units sold was up 35 percent in the month.

Total industry sales during June were $1.1 billion, down 6 percent. But NPD analyst, Anita Frazier, is expecting the year to end with a bang and may match last year's $20 billion in sales.

"Given the strong slate of content still to come, and the release of the Move and Kinect controllers, which I believe will spark additional interest in gaming, I think we could see the total year new physical retail sales come in at $20 billion," she said in NPD's release.

The best-selling accessory last month was the Xbox 360 1,600 point card.

Here are the top 10 games sold in the U.S. last month. Notably missing is the new Tiger Woods PGA Tour 11 game, which sold 68 percent fewer copies than last year's edition did in its first month, NPD said in the release.

RED DEAD REDEMPTION - 360
SUPER MARIO GALAXY 2 - WII
RED DEAD REDEMPTION - PS3
NEW SUPER MARIO BROS. WII - WII
JUST DANCE - WII
WII FIT PLUS W/ BALANCE BOARD - WII
TOY STORY 3 - NDS
UFC 2010: UNDISPUTED - 360
LEGO HARRY POTTER: YEARS 1-4 - WII
UFC 2010: UNDISPUTED - PS3

Here are June's game hardware sales by unit:

PS3 304,800
PSP 121,000
Xbox 360 451,700
Wii 422,500
DS 510,700

Between 15 and 25 percent of Xbox 360 owners are likely to buy a Kinect motion controller in the first year, generating at least $900 million in hardware sales, according to a note from analyst Sandeep Aggarwal at Caris & Company reported by Barron's.

Aggarwal expects Kinect will also help Microsoft sell an additional million consoles, generating about $300 million of incremental revenue. Combined with lower attrition on Xbox Live, higher subscriber growth and software sales, he comes up with the $2 billion Kinect bump.

Kinect goes on sale in November.

He's expecting Microsoft stock to hit $37, boosted by Kinect, increased enterprise spending and Windows 7 demand.

The note also said the risk to Microsoft from Apple's iPad is "overblown" and he expects "significant upside from Azure and Office 2010."

Microsoft stock is up a little over 2 percent to $24.84 at last check, but there is a lot of news out of the partner conference.

Zombie Studios' action shooting game "BlackLight: Tango Down" is debuting on Xbox Live today, the start of a multimedia media franchise for the venerable Pioneer Square company.

Highlights of the game -- which is being pitched as a blend of "Blade Runner" and "Call of Duty" -- are its weapon customization system and a "hyper reality visor" imaging system loosely based on systems used by real soldiers.

"BlackLight" is being sold for $15 as a downloadable game on Xbox Live Arcade. Versions for the PlayStation 3 and PC will appear in a few weeks on PlayStation Network and the Games for Windows Live service.

What's most notable about "BlackLight" may be its business development. Even before the game was done, Zombie reached deals to produce "BlackLight" comic books and a movie being developed by 20th Century Fox.

Zombie has been making military-themed games since it began in 1994, including the government-funded "America's Army." Chief Executive Mark Long is a retired major who worked in military research and development before entering the game business.

"BlackLight" won a few kudos from critics at the E3 show last month in Los Angeles, but didn't make it into the upper tier that won coveted Game Critics Awards chosen by 31 publications.

Bellevue's Valve was the local champion, with its "Portal 2" winning "Best PC Game" and "Best Action/Adventure Game."

Nintendo's 3DS -- the 3-D version of its DS handheld game system -- won best of show and best hardware, beating Microsoft's Kinect and Sony's Move controllers.

The Northwest can also lay claim to the best sports game of the show - NBA Jam, which was devleped by Electronic Arts Canada in Vancouver, B.C.

Other Game Critics Awards:

Best Original Game
"Dance Central" (Harmonix/MTV Games/Microsoft for Xbox 360)

Best Console Game
"Rage" (id Software/Bethesda for PC, PS3 and Xbox 360)

Best Handheld Game
"God of War: Ghost of Sparta" (Ready at Dawn/Sony Santa Monica for PSP)

Best Action Game
"Rage" (id Software/Bethesda for PC, PS3 and Xbox 360)

Best Role Playing Game
"Star Wars: The Old Republic" (BioWare Austin/LucasArts/EA for PC)

Best Fighting Game
"Marvel vs. Capcom 3: Fate of Two Worlds" (Capcom for PS3 and Xbox 360)

Best Racing Game
"Need for Speed Hot Pursuit" (Criterion Games/Electronic Arts for PC, PS3 and Xbox 360)

Best Strategy Game
"Civilization V" (Firaxis/2K Games for PC)

Best Social/Casual Game
"Rock Band 3" (Harmonix/MTV Games/Electronic Arts for PS3, Xbox 360, and Wii)

Best Motion Simulation Game
"Dance Central" (Harmonix/MTV Games/Microsoft for Xbox 360)

Best Online Multiplayer
"Assassin's Creed: Brotherhood" (Ubisoft Montreal/Ubisoft for PC, PS3 and Xbox 360)

Special Commendation for Graphics
"Rage" (id Software/Bethesda for PC, PS3 and Xbox 360)

Video game sales in the U.S. fell 5 percent to $823.5 million last month, but it was still the industry's third best-selling May on record, NPD said in its monthly report this month.

Console sales were flat and sales of handheld players fell. Overall hardware sales were down 20 percent while game software sales rose 4 percent.

But the Xbox 360 and PS3 platforms were strong, with the Xbox contributing the biggest share of industry sales so far in 2010. Sony's PlayStation 3 saw the biggest percentage growth, with sales of hardware, software and accessories up 32 percent in May.

Nintendo hardware outsold them both, though, moving 334,800 Wiis and 383,700 DS handhelds, compared with 194,600 Xboxes, 154,500 PS3s and 59,400 PlayStation Portables.

"Red Dead Redemption" on the 360 was the top selling game with 945,900 units sold last month. The top 10:

RED DEAD REDEMPTION - 360
RED DEAD REDEMPTION - PS3
SUPER MARIO GALAXY 2 - WII
UFC 2010: UNDISPUTED - 360
UFC 2010: UNDISPUTED - PS3
WII FIT PLUS W/BALANCE BOARD- WII
NEW SUPER MARIO BROS. WII - WII
ALAN WAKE - 360
POKEMON SOULSILVER VERSION - NDS
SKATE 3 - 360

Microsoft and Sony sent boasts to accompany the report. Samples:

Microsoft: "Xbox 360 continues to outsell the PlayStation 3 at retail for the fifth consecutive year and every single month of 2010. ... Half of May's best-selling console titles are on Xbox 360."

Sony: "In May, we experienced our tenth consecutive month of year over year growth, and it is clear that the demand for PlayStation 3 and its incredible content is not subsiding as evidenced by an increase of 18% in PS3 hardware sales and revenue increase of 58% in PS3 software sales since last May."

Bloomberg is reporting that Hulu and Sony are working to put the TV and movie service on the PlayStation Network, a deal that could be announced next week.

Hulu has been working toward a shift from free, ad-supported videos to a subscription model. Bloomberg's story said the service would carry a fee for users of PlayStation's free online network.

It didn't mention that Sony's preparing to launch a paid version of the PSN that will cost $50 and include premium offerings, such as games and video content. I'll bet premium PlayStation subscribers will get some kind of deal on Hulu, perhaps even free access, at least to start.

Bloomberg noted that Hulu is also talking to Microsoft about distributing a $9.95 per month service through Xbox Live, as reported earlier by Reuters.

Maybe the competition between the game networks will help keep Hulu's price down, or result in deals for Xbox and PS3 owners after Hulu starts charging.

LOS ANGELES -- A few random photos from E3.

Welcome to L.A.:

One for the scrapbook:

Yes, the game will have unlockable beards. Really.

The line to see the Nintendo 3DS, on the platform under the red bar

LOS ANGELES -- The interview with Cliff Bleszinski, design director of Epic Games, was supposed to cover "Gears of War 3," the next version of the Xbox 360 hit.

But he took a few other shots.

North Carolina-based Epic sold more than 12 million copies of the first two versions of "Gears," an ultra bloody, military-themed shooting game.

"Gears 3" goes on sale in April, extending the run of "big three" shooting games for the Xbox that begins with "Halo: Reach" on Sept. 14 and "Call of Duty: Black Ops" on Nov. 9.

Bleszinski outlined improvements, such as the ability to attack enemies with a chainsaw and then kick them toward other enemies where they explode, so "you get more deaths that way."

Then the influential and outspoken developer touched on a few other topics while holding court with a handful of reporters in Microsoft's treehouse-like pressroom elevated above the E3 show floor. Here's an edited sample.

On the Xbox Kinect:

LOS ANGELES -- Here are a few guys at E3 figuring out how to use Xbox Kinect, including the hover command I mentioned in my quickie review of the system. Eventually they figure it out and start playing virtual football.

LOS ANGELES -- Who are the hundred million mainstream families that Microsoft, Sony and Nintendo are chasing with new motion controllers, games and consoles revealed at this week's E3 conference?

They're not necessarily newcomers to video games. They may already have an older console and might be thinking about an upgrade, especially if they're going to buy a new TV.

That's according to PlayStation's Peter Dille, senior vice president of marketing at Sony Computer Entertainment America.

During an interview at the show, Dille described some of the nuances of the three-way battle between the companies.

For instance, he said Sony is hoping that its Move motion controllers will make the PlayStation 3 more appealing to families who bought a Wii a few years ago and now want to get more into gaming.

"If you look at someone who has had a Wii in their house, to me there is a more natural progression to our platform than the 360," Dille said. "You're probably talking about a family looking for entertainment, and the PS3 device is something that can deliver entertainment for the whole family. ... It's not just a platform that's got a lot of first-person shooters on it."

LOS ANGELES -- Theoretically anyone can learn the cool new moves, according to Harmonix, which demonstrated its new "Dance Central" game for the Xbox Kinect during Microsoft's press event today.

Players are taught dance moves and then compete in competitions, during which their avatars are displayed on the screen via Kinect, adding a new layer to the rhythm game genre.

"Dance Central" includes more than 600 dance moves plus 90 routines, including some from original music videos, along with a soundtrack of pop, hip hop and R&B music ranging from Lady Gaga to the Beastie Boys.

To demonstrate its educational value, Harmonix brought out one of its pasty developers to show how he learned to dance with the game. He's at lower left by the podium and his avatar is on the big screen in this clip:

LOS ANGELES -- Here's a short video of "Turn 10,' an Xbox driving game coming out next year that uses the Kinect controller. The guy in the bottom right corner of the frame is "driving" by holding onto an imaginary wheel. I couldn't tell if he used the paddle shifters.

I don't think he used the paddle shifters, which would have been a real test of the Kinect's accuracy.

(Maybe it's just as well it's not coming out until next year. The new "Need for Speed" looks amazing, and Sony's likely to announce "Gran Turismo" -- perhaps in 3-D -- Tuesday.)

LOS ANGELES -- Here's a quick gallery of pictures I took of the new Xbox and a few of games shown during Microsoft's press conference this morning.

From the back, where there's still an HDMI port. You can also see that the glossy case is probably going to get a few smudges.

From above, you can see the grill of the new Xbox and the angular shape of the Kinect:

"Dance Central" from Harmonix will retire all those plastic dance mats. The player is at the bottom left of the photo:

Also at risk is Wii Fit, which is going to be challenged by Kinect exercise games like this one from Ubisoft, which shows the player's body in action on the screen. Here the player is to the right of a virtual exercise instructor:

LOS ANGELES -- Any concerns hard core gamers may have had after Sunday night's family-friendly Kinect launch event were allayed when Microsoft's E3 press conference opened this morning with a bloody and thrilling preview of "Call of Duty: Black Ops."

Even the rats in the tunnels of Laos shimmered in the flash of a revolver in the preview of the shooting game coming to market in November.

Then Don Mattrick, head of the Xbox group, came on stage and announced an exclusive deal with "Call of Duty" publisher Activision to get expansion packs first on the Xbox through 2012.

Mattrick noted that it's the 10th anniversary of the Xbox business and mentioned the Kinect device in a quick introduction before a demonstration of "Metal Gear Solid Rising."

"Were transforming the way you play games, the way you enjoy entertainment and the way you connect to friends and family," Mattrick said.

Then the show continued with more previews of upcoming versions of beloved hard-core games.

After some bloody slashing with a samurai sword, the "Metal Gear" demo ended with a funny bit with the warrior slicing watermelons.

Phil Spencer, Microsoft game studios chief, came on stage and talked about how games have entered mainstream culture. He also noted that all the following demonstrations would be of Xbox exclusives.

More vivid, fast-paced action ensued. "Gears of War 3" was shown -- in four-player co-op mode with the new female lead characters -- by developer Cliff Bleszinski.

"Fable III," an adventure game based in the 1700s, was shown by Peter Molyneux, creative director of Microsoft's European game studio, and Spencer announced an exclusive partnership with Crytek.

The crowd hushed, though, when Bungie's Marcus Lehto came out and gave the first showing of the "Halo: Reach" campaign.

"I can't wait," the Canadian journalist next to me said.

A highlight of the preview included the "Saber," a jetlike rocket ship that Halo's Master Chief gets to launch into space and control in an outer-space dogfight.

With ears ringing, the show switched to Kinect, the motion controller formerly known as Project Natal.

"Imagine a world where you can watch a movie without a remote, play a game without a controller," Xbox VP Marc Whitten said.

"This is what happens when technology gets out of your way."

Engineer Ron Forbes showed how voice and gestures can be used to control Xbox entertainment with Kinect. He signed into the console by waving at the Xbox, and called up a special Kinect menu with a second wave.

After calling up a movie, Forbes controlled its playback with voice controls, saying "Xbox, pause," for instance, to pause a movie.

"Video Kinect," a video chat feature, worked well in a live demo between Los Angeles and Dallas. Across the bottom of the screen, during the conversation, the Bing logo displayed links to news, sports, TV, movies and music.

One of the callers used her hand to drag a movie up so both participants could watch it together, on a window between the two chat windows.

Whitten said the video chat service will link to the "hundreds of millions" of people using Microsoft's Live messenger network.

Also announced was an exclusive partnership with ESPN that's putting live and on-demand sports events on the Xbox. The deal includes more than 3,500 sporting events in the first year, including ollege football, basketball, soccer, NBA and Major League Baseball.

ESPN's Josh Elliott and Trey Wingo were on stage, using voice commands to call up a game and initiate an instant replay with a voice command -- "Xbox, replay."

The ESPN service is free to people with Xbox Live gold subscriptions that cost around $60 per year, which makes Xbox Live an intriguing alternative to cable TV.

"Kinectimals" -- a Kinect pet game that makes Webkins look prehistoric -- was demonstrated with a girl showing how she can play with her virtual tiger cub, even spinning a jump rope for the animal to hop over on the screen.

Kinect goes on sale Nov. 4, Spencer announced. He and the company, however, did not announce a retail price, although speculation is it'll sell for about $130.

Mattrick did reveal a new, smaller Xbox 360 with built-in WiFi and a 250 gig hard drive that will be available in stores later this week. It's glossy block with an angular shape and chrome highlights. It's going to cost the same as the current 250 gig model -- $299.

LOS ANGELES -- So much for the mysterious "Project Natal" code name. It's given way to Kinect, the official name for the new motion tracking controller and camera system coming to the Xbox in November.

Kinect is a combination of kinetic and connect, representing the controller's dual purpose - giving the console motion control plus new communication capabilities such as video chatting and sharing in-game photos captured with the device.

Microsoft managed to keep the name secret until just before an elaborate Cirque du Soleil production tonight that the company commissioned for the Kinect launch.

But USA Today - which had worked with Microsoft on a Kinect story to be published after the event - briefly posted the story earlier Sunday. Game and gadget blogs pounced before the story was taken down, and the word was out an hour or so before the Cirque production began.

It was awkward because most of the reporters covering the game business were working their way through Microsoft's elaborate entry system for the Cirque showing, during which they were barred from using phones or other electronic devices.

The show is being staged for two nights only, at Galen Center, the University of Southern California's basketball arena. It's completely different than the Cirque show now being put on in Microsoft's backyard in Redmond.

For Kinect, Cirque created a specatacle with a tropical islandish theme that faded into a series of Kinect demonstrations done by a pretend family in a rotating living room that at times had the family upside down, sitting in a couch on the ceiling, with a performer walking upside down across the ceiling.

Attending were 3,000 Microsoft employees, industry partners and reporters who had to don white ponchos with shoulder pads that glowed and changed colors during the finale.

A boy in safari clothes rode in on a mechanized elephant and climbed a rock mountain as drums and chanting grew more intense. Then the uppermost rock turned into a huge ball with the Xbox logo, with the boy on top. (Here's a picture provided by Microsoft)

He asked for a name and letters on a giant screen unscrambled to read "Kinect."

The production was Microsoft's most extravagent launch since the Rolling Stones were tapped for Windows 95's theme song. It's going to be broadcast on MTV, Nickelodeon and other channels Tuesday.

Mike Delman, vice president for the interactive entertainment business, wouldn't say how much the show cost but said that the broad exposure it's going to receive through TV broadcasts "make it an exceptional bargain for us."

"I think of it as a massive awareness-builder," he said.

Yasmine Khalil, events director for Montreal-based Cirque du Soleil, said they "wanted to create a legend" with the show by performing it only twice this week, once for Microsoft and its partners and a second show for the public.

"We don't do commercials, we are storytellers,'' she said.

Cirque was excited to work with Kinect, which it sees as more than just a gadget. "We don't see it as a product, we see it as something else," she said.

So will Cirque now produce its own Kinect game for the Xbox?

"Maybe," Khalil said. "You never know."

Games shown during the performance included brief glimpses of a "Star Wars" title with gesture-controlled light sabers, sports games such as beach volleyball, hurdles and javelin, and the clearest hit in the bunch: A pet game with a cute tiger cub that approached the player, who could "pet" the animal using Kinect.

Microsoft's apparently going to take on Webkins with the tiger game. Guests were given stuffed animals with special coded tags for the game. USA Today's story said the game is called "Kinectimals" and it will let players train and play with 20 different kinds of virtual cats.

Hard-core gamers attending the show may smirk at the Kinect name and the family orientation of the games shown during the Cirque production.

But as Stephen Tolouse, Xbox Live director of policy and enforcement, noted in a blog post tonight, a lot of people also made fun of Nintendo for choosing the name Wii.

"And yet look at how many units it's sold. The trick is in the magic of the experience," he wrote.

Tolouse also talked about the challenge of replacing the "Project Natal" name:

It's really hard when you have a cool "code name" that lasts for so long to replace it with its true name, a name that it really deserves to communicate why it's desirable. Code names are meant to be cool, as code names. True product and technology names are far more difficult. Marketing people get a really bad rap when they face a challenge like that and there's often a lot of eye rolling and "what were they thinking" that goes on. Coming up with these things is a high wire act with no net.

Tolouse, at least, believes Kinect is "a perfect name for this technology" and said the marketing team "nailed it."

We'll see how things go this holiday season. Either way, I want to buy my kids that tiger game.

With the E3 game conference less than a week away, the industry titans are getting their talking points ready.

Xbox director Aaron Greenberg got the ball rolling today with a tweet that slapped Sony, saying that Xbox exclusive "Halo 3" has outsold all of the top PlayStation 3 exclusives:

Just in from research team (NPD): Halo 3 has outsold Resistance 1 + 2, Uncharted 1+2, Killzone 2 and God of War III COMBINED....wow

But how does "Halo 3" stack up against "Wii Fit"?

It costs as much as a console and doesn't sense gestures like Project Natal.

But game playing dads may still covet the new Ferrari Wireless GT Cockpit 430 Scuderia Edition controller from Thrustmaster.

The folding metal controller has 50 hours of battery life, 10 meters of range and weighs 23 pounds. It works with PCs and the PlayStation 3; a spokeswoman said there aren't currently plans for an Xbox version.

It also costs $250 (which btw could be $100 more than a Project Natal setup, according to a report saying Natals will go on sale around October 26 for $149 or $299 bundled with an Xbox 360 Arcade edition.)

The Army's getting early access to Microsoft's Project Natal motion and voice recognition system for the Xbox as part of an expanded military partnership with Microsoft Research.

Natal could be used to add "Minority Report" style controls to military systems, according to an Information Week report.

There was no word on any plans to militarize Nintendo's Wiimote.

The Army is Microsoft's biggest single customer, the story notes, and has a partnership giving it early access to Microsoft research and collaboration with the company's researchers.

Microsoft's been demonstrating Natal and showing its potential beyond the Xbox to wow other big customers recently, including bigwigs attending the company's CEO Summit this week.

Natal's going on sale later this year. Microsoft's expected to reveal its price and other details next month.

An excerpt from Information Week's story:

The partnership began last year as with multi-touch research, which further developed a project called Command and Control Multitouch Enabled Technologies (COMET) by enabling the Army to leverage Microsoft Surface and Microsoft Research's multi-touch expertise. Last month, the effort was given a multi-year extension and tacked on a number of additional Microsoft products.

According to command and control directorate computer scientist Nick Palmer, one of the broader goals of the effort, in addition to increasing usability and productivity, is to decrease costly technology training requirements by relying more heavily on natural, intuitive user interfaces.

Here's an Army video showing possible use of a Microsoft Surface computer.

Here's an edited version of a quick interview I had with Bungie President Harold Ryan on the Kirkland studio's new partnership with Activision Blizzard, giving the Activision exclusive rights to Bungie's next game after "Halo: Reach."

Did Microsoft make a bid to publish your new franchise?

We've been in discussions with Microsoft. We still continue to have a great relationship with those guys.

Ultimately for us the balance between being exclusive to either first party, whether it be Microsoft or Sony, to really engage with a globally engaged partner like Activision was a major component of not choosing Microsoft or Sony.

Will you move the studio to Santa Monica?

There is not a chance we'll move the studio to Santa Monica.

Will you share details of the new game before "Halo: Reach" goes on sale?

You should expect that were focused on Reach.

When will you release the new game?

It will be sometime. I know its going to knock everybody's socks off.

So, 2011 perhaps?

I wouldn't commit to a date.

Will your next franchise be bigger than "Halo"?

Absolutely.

Incrementally or exponentially?

Exponentially ... we've spent a lot of time laying out plans that took what we learned over the next 10 years.

Does Activision have exclusive rights to additional franchises developed by Bungie over the next decade?

This particular deal we're focusing on one franchise. There's potential for new franchises that we come up with for Activision.

Will this mean a big increase in employment at the studio?

We're going to continue to do what we've been doing since we left Microsoft (and work to) attract the best people in the industry. We're not currently planning to take on major acquisitions or anything that would drastically grow us.

Do you have enough resources to build multiple franchises at once now?

We have enough people to do two things at once but what we're planning for our next IP (intellectual property) is super aggressive and it's going to be the biggest thing ever.

Kirkland game studio Bungie, the creator of the hit "Halo" franchise for Microsoft, today announced a mondo publishing deal that will make Activision Blizzard the exclusive publisher of its next franchise for 10 years.

Bungie spent two years developing an entirely new game that will be released sometime after its "Halo" finale, "Halo: Reach" is released by Microsoft this fall.

A value wasn't placed on the deal, but the entertainment franchise at stake is likely to be worth more than $1 billion and consume millions of hours of people's time. Activision stock rose 3 percent, to close at $11.26 today.

Bungie's likely to release at least three titles in the new franchise, the first of which could go on sale in 2012, according to a research note by analyst Shawn Milne at Janney Montgomery Scott.

Microsoft -- and Sony -- were among the companies that made bids for Bungie's next title but the studio opted for a partner that would publish to all platforms, said Harold Ryan, Bungie president.

"We had agreed with Microsoft awhile ago to let them have first look at our game, so we did that," Ryan said. "But we retained the right to negotiate for the best deal for the studio."

Microsoft's games group issued a statement noting that it continues to have a relationship with Bungie as a developer for the Xbox 360.

"We're not at liberty to discuss details of Bungie's publishing agreements," the company said. "We respect Bungie's decision as an independent studio to develop games for multiple platforms."

Santa Monica, Calif.-based Activision is the top publisher of Xbox and PlayStation games in the U.S. and one of the top publishers worldwide. Its portfolio includes the biggest rival to "Halo," the "Call of Duty" franchise, but it's in a legal fight with studio Infinity Ward over "Call of Duty: Modern Warfare 2" bonus payments.

Bungie was started in Chicago in 1991 and moved to Kirkland after Microsoft bought the studio in 2000. They split in 2007, but Microsoft continued to publish the "Halo" franchise.

Now the 180-person studio has financial security and the backing of a top game company for the next decade. It also means the former Microsoft studio's future games will be available on platforms besides the Xbox.

Activision's getting "exclusive, worldwide rights to publish and distribute all future Bungie games based on the new intellectual property on multiple platforms and device. Bungie remains an independent company and will continue to own their intellectual property," the release said.

Additional financial details weren't disclosed.

The announcement noted that Bungie's "Halo" games have generated about $1.5 billion in sales, according to NPD, and been played online more than 2 billion hours.

Activision Chief Operating Officer Thomas Tippl said the deal with "one of the world's best developers" strengthens Activision's growth plans. It also solidifies the company's position as the leading publisher of interactive games played online.

Tippl noted that Activision's portfolio includes leading online games such as "World of Warcraft," "Call of Duty" and now the work of the "Halo" creators.

"Now we can bring all that expertise together and it makes a pretty compelling case we can achieve, as Harold likes to phrase it, world domination," he said.

Tippl said Bungie isn't filling a slot created by Activision's fallout with Infinity Ward.

"It's completely unrelated," he said. "We started the discussion with Bungie nine months ago. The timing is purely coincidental. In fact, we had already signed a term sheet with Bungie in March and we just completed our long form today."

Even though it didn't get the publishing contract, Sony will now get Bungie content onto the PlayStation. In case this wasn't clear, the company's computer entertainment group released a gleeful statement of congratulations:

"The partnership between Bungie and Activision is a big win for gamers worldwide. Combining Bungie's creativity with the incredible power of PlayStation 3 will add serious muscle to action gaming. We look forward to extending Bungie's 'next big action game universe' with PS3 users."

Here's the video version of the release:

The biggest tech product coming out of the Seattle area this year, other than Microsoft's Office 2010 suite, may be "Halo: Reach."

Millions of gamers around the world are waiting for Kirkland studio Bungie to release the final installment of the blockbuster franchise that helped establish the Xbox platform.

To prime the pump and smooth any rough spots before "Reach" goes on sale this fall, Bungie and Microsoft are beginning a massive public testing process May 3.

At least 2 million people are expected to try the free online beta version of "Reach's" multiplayer games, using access codes provided with the "Halo 3: ODST" game, which went on sale last September.

The swarm will stress test the game's infrastructure and help designers tweak the setup so the game is as balanced and fun as possible.

Bungie is hoping it will be the largest beta test of any console game, according to Brian Jarrard, the 180-person studio's community director.

"We know that we have passionate fans who we are going to encourage to try to break the game and find these issues now so we don't have to deal with it in the fall,'' he said.

Jarrard and Chris Carney, a former Seattle architect who is now a multiplayer design lead at Bungie, shared details of the beta, the game and more last week. Here's an edited transcript of the interview:

Here's a video from Sony's event in Seattle showcasing the PlayStation 3 Move system and SOCOM 4, followed by today's column - a Q&A with Brian Soderberg, president of SOCOM developer Zipper Interactive.

For its noisy shootout with Microsoft this fall, Sony is turning to one of its big guns in Redmond.

Sony is counting on Zipper Interactive to produce a blockbuster game for the PlayStation 3 this fall, when it's releasing a new version of its hit "SOCOM" military-action franchise.

The game will help showcase a new PS3 motion-control system called Move that's expected to cost about $100.

Move is going head-to-head with Microsoft's Project Natal control system for the Xbox 360 in the crucial holiday season.

Both companies are hoping these exotic new control systems will refresh their maturing consoles as the economic recovery takes hold.

They're also hoping for the kind of success that Nintendo has enjoyed with the Wii, attracting players turned off by complicated control systems, while also inspiring game studios to create new forms of immersive entertainment.

Zipper and "SOCOM" helped Sony leap ahead in the past.

When the PlayStation 2 introduced a network adapter enabling online play in 2002, the first "SOCOM" game was released to showcase this capability. The "SOCOM" franchise went on to be one of the PS2's biggest hits, selling more than 10 million copies, and Sony bought Zipper in 2006.

"SOCOM 4" is still early in development, with no price or release date set yet, but Sony has been showing it to fans and reporters in events across the country, including one in Seattle earlier this month.

During that session, I caught up with Zipper President Brian Soderberg, who co-founded the studio in 1995 after working on military-simulation systems. Here is an edited excerpt of the interview:

Q: What was it like to make a game with Sony's Move motion-control system?

A: Well, it actually was quite easy. I was a little skeptical after playing the Wii because it's very casual game and "SOCOM 4" is more of a core game. Although really, we're shooting for a more accessible game. I think the Move does that for us â€" it's much easier than trying to get both thumbs going.

Q: I'm curious about how physical the game will be, like with physical attacks?

A: We're still researching additional gestures. I know we're going to do some close-quarters moves like rifle butts and maybe bayonet style. Other things you can investigate is grenade throw and things like that.

Q: I wonder how people will feel about intense games like this and motion controls. When you start killing characters with your motions instead of just your thumbs, is it going to be a different psychological experience?

A: I think it will. It's interesting, when you walk by our offices and you see people playing with it, they actually seem a little more immersed, because it is more like a gun.

I think it actually opens the door for more immersion and obviously when you start doing gestures you're getting more physical and more into the game.

Q: How far can you go this direction? Is there some kind of boundary you don't want to cross, having people do these things physically?

A: I don't know about boundaries. It feels like there are really no boundaries that you have now. You have full 3-D motion and such accuracy and precision; you can pretty much do anything. Anything you can do with two hands, you can start to make that the interface to your game.

Q: It's like we're at a crossroads with entertainment, with these new systems taking us into the next realm.

A: I think this really is. It's just what are the developers going to do to take us to that next level.

Q: How will Sony's motion system do compared with other motion systems coming out this year?

A: Sony took their time and they did some really neat things. Their thing was to be super comprehensive with the full 3-D space recognition, plus the full three axis recognition, plus the precision and very low latency. It makes it possible to play all these core games, besides casual games, with such precision. I think the core game players are maybe going to embrace this as well.

Q: Do you think Microsoft's Natal system is sharp enough for aiming and motion in core games, or do you think they might just have minigames that show off Natal capabilities?

A: The minigames, casual games, are the obvious things that would be easy to do with that system. I'm not sure how you start doing guns in it. Maybe they're going to have add-on controllers, additional peripherals, added into it.

Q: Is it hard to keep your team motivated to build the fourth edition of something?

A: I always think that. I always think they're going to get tired of it. But when I actually check around the team a lot of them are really rabid "SOCOM" fans too, so they get really excited about it.

Q: I hear this version's going to be more cinematic.

A: Definitely. Besides the usual emphasis on AI [artificial intelligence] and replayability and being able to do things from different directions, the single-player will have a very cinematic story. As you play through you'll actually learn things about what's going on with your enemies and your teammates. There will be some cool surprises, that sort of thing.

We did some really cool things with the cinematics. Rather than just doing motion capture where you hook up the guys and capture the motion, at the same time we also captured the voice so we did dialogue and motion together. ...

Q: So they basically acted it out?

A: They basically were actors, yeah. We capture everything. We even did some digitization of the camera moves as well, so we had a handheld camera and a professional cameraman to actually do the motion. It really makes a difference; it makes it really feel like a movie.

Q: I understand this material will appear not just in cinematic sequences but during game play as well?

A: Absolutely. As much as we can. First of all, it's going to run in the actual game engine, so it's not like movies [playing at certain points during the game]. As much as we can, we will not take the camera away from the player. You'll be going through the environment and you'll just experience these cinematic events. ...

Q: How is business? We heard dreary reports about the game industry over the past year and now all sorts of interesting new things are coming to market. Are we into a new cycle?

A: It seems like it's turned around to me. Sony's really bullish on the future and we have some really big titles ... just came out. There are some big titles coming out and I think Sony's really doing well so I think the business is turning around.

Q: Do you think people have money to buy these new games and motion systems?

A: I think so. These new games that have been coming out recently have some pretty big numbers with what they sold. I think things really are turning around.

Marking the end of "Halo 2" online play after Xbox Live pulled the plug this week, the Bungie team shared bittersweet, hilarious and sometimes raunchy stories behind the hit Xbox game on a special memorial page today.

In addition to glimpses of life inside the secretive Kirkland game studio, the page has anecdotes from the intense rush to finish the game, art proposals that weren't included and a spectacular batch of game storyboards. Here's a bit from a screen grab:

Most amazing, though, may be the final tally of "Halo 2" online activity over the last five years. A sample:

Unique Players (not including guests): 6,603,900
Kills: 36,784,837,266 (Or something like 5.5 times the current population of the earth)
Assists: 10,422,552,715

Seconds playing campaign on live: 850,462,468,852
Minutes playing campaign on live: 14,174,374,480
Hours playing campaign on live: 236,239,574
Days playing campaign on live: 9,843,315
Years playing campaign on live: 26,950 (Or about 1.7 billion dollars at a minimum wage of 7.25)

After a long cold winter, video game sales perked up in March, posting a 6 percent gain to $1.52 billion, NPD reported in its closely watched monthly report.

It's the first overall sales increase for the industry outside of a holiday season since February 2009, the firm said.

But year-to-date sales are still down 7 percent, to $3.96 billion.

Nintendo's Wii and DS still sold the most units by far, and the Xbox 360 kept bragging rights over the PlayStation 3.

Here's the monthly tally of U.S. console sales:

PS2 118,300
PS3 313,900
PSP 119,900
Xbox 360 338,400
Wii 557,500
DS 700,800

Price cuts helped unit volume. Console prices were down 16 percent in March and software prices were flat.

Sony's "God of War III" was the top selling game with 1.1 million copies sold, followed by Nintendo's "Pokemon SoulSilver Version" with 1.02 million units sold.

The PS3 version of "Final Fantasy XIII" was the third best-selling title, outselling the Xbox version 828,200 to 493,900.

The reverse was true for fourth-ranked "Battlefield: Bad Company 2," which sold 825,500 copies of its Xbox version and 451,200 for the PS3.

Here's the top 10 list for March:

GOD OF WAR III PS3
POKEMON SOULSILVER VERSION NDS
FINAL FANTASY XIII PS3
BATTLEFIELD: BAD COMPANY 2 360
POKEMON HEARTGOLD VERSION NDS
FINAL FANTASY XIII 360
NEW SUPER MARIO BROS. WII WII
BATTLEFIELD: BAD COMPANY 2 PS3
WII FIT PLUS W/ BALANCE BOARD WII
MLB 10: THE SHOW PS3

One of the higher profile games out of the Seattle area next year may be "Lord of the Rings: War in the North," which Bothell's Snowblind Studios is making for the Xbox 360, PlayStation 3 and PC.

The 2011 release was announced today by Snowblind's parent company, Warner Brothers, and will be on the cover of PlayStation Magazine's May edition.

Warner is calling it a "mature," epic, multiplayer action-role playing game based on the novels by J.R.R. Tolkien.

"In 'The Lord of the Rings: War in the North,' Snowblind will deliver an action RPG for core gamers featuring authentic narrative and environmental locations from J.R.R. Tolkien's original 'The Lord of the Rings,' " Snowblind founder and studio head Ryan Geithman said in the release. "This game is a natural evolution of the acclaimed RPG gameplay that Snowblind has consistently delivered over the past years. Players and fans will experience an innovative approach to online co-op gameplay, woven throughout every facet of the game in a way that only Snowblind can deliver."

Retail sales of video games sank in February, falling 15 percent to $1.26 billion, NPD reported today. Game hardware sales fell 20 percent, software was down 15 percent and accessories were down 1 percent.

But there was a silver lining for Microsoft, whose Xbox 360 was the best selling console of the month for the first time since September 2007, when "Halo 3" was released. The company sold 422,000 consoles last month, compared with 360,100 PlayStation 3s sold by Sony and 397,900 Wiis sold by Nintendo. The handheld Nintendo DS sold 613,200 units.

I wonder if next week's arrival of Sony's "God of War III" will give PS3 the top spot in March.
"Bioshock 2" on the 360 was the top selling game, followed by "New Super Mario Bros. Wii" and "Modern Warfare 2" on the 360. NPD said "Modern Warfare 2" has become the third best-selling game ever, with just under 10 million units sold since its launch in November.

Sony finally shared details of the new PlayStation 3 motion control system that's going to battle it out with Microsoft's Project Natal (and the Wii) this holiday season.

The word from San Francisco, where it was shown last night at the Game Developers Conference, is that it's fun to play.

But it sure looks familar -- just like Wii controllers, including a primary controller topped with a ball that reminds me of the Jack in the Box antenna globes. A secondary controller is pretty close to the Wii nunchuck, but with Bluetooth wireless instead of a cable.

Starter kits with a sensor and a game will cost less than $100.

Here's a Sony video with game demonstrations via Joystiq, which has a big roundup on the gadget.

Redmond's Gas Powered Games today launched "Supreme Commander 2," a new version of its hit real-time strategy game for the PC.

Players command and customize massive land, sea and air battles with hundreds of individual units, plus 27 "experimental" battle machines.

Gas Powered's also releasing a version for the Xbox 360 on March 16, the first time the company has developed a console version of the game in-house.

Real-time strategy games are a niche market but they've been a profitable one for Gas Powered, especially as other game companies have shifted their focus to broader markets.

"A lot of people have walked away from this market and we see it being wide open now," said founder Chris Taylor (pictured).

The "Supreme Commander" franchise has sold 1.5 million copies, including around 800,000 when the last version was released in 2007. Taylor's hoping "Supreme Commander 2" will sell at least a million copies.

Gas Powered recently employed around 55 people but Taylor's expecting to let 10 to 12 go after the game's released, as work slows between releases.

"It's nothing like Hollywood but there are some similarities - you build a production team, you make a movie and then you disband," he said.

Fortunately Gas Powered already got another huge project in the works. Taylor revealed last month that the company's using its RTS technology to build a new franchise called "Kings and Castles" with kings vying for control of a medieval fantasy world.

Meanwhile Japanese publisher Square Enix is releasing "Supreme Commander 2," which retails for $49.99 and is rated E10 for players 10 or older.

A few screenshots:

Here's a Gas Powered video of Taylor introducing team members now working on "Kings and Castles":

I didn't make it to the Xbox press event in San Francisco today, but word from the show is the beta of Halo Reach begins May 3.

Here's the January trailer of Bungie's latest:

Taiwanese manufacturer Pegatron Technology was chosen by Apple to build the next-generation iPhone coming out later this year, according to a report in Taipei-based DigiTimes.

It noted that Microsoft has also hired Pegatron to build the "Project Natal" controllers for the Xbox 360 that will go on sale later this year.

Imagine if they jumbled things up and shipped motion-sensing iPhones or Natal controllers that synced to iTunes.

Pegatron "has reportedly landed a contract to undertake OEM production of the next-generation iPhone scheduled for launch later in the year, joining Foxconn Electronics which manufactures current iPhones for Apple, according to industry sources," the report said.

Not much was said about the Natal device, which has been kept largely under wraps. Here's an image I took of one of the prototypes that Microsoft has provided to studios developing Natal games; this one's mounted on a camera tripod:

Mary Jo Foley this morning broke the news that Microsoft's doing a pretty big reorganization of its Entertainment and Devices group, with Xbox exec Don Mattrick taking over the consumer TV, music and video business.

Enrique Rodriguez, a TV veteran recruited in 2003 by E&D boss Robbie Bach, is leaving the company. For now Bach's going to directly lead the business providing Micorsoft's TV platform to phone and cable companies.

Here's Microsoft's statement, released by its P.R. firm:

"As Microsoft continues to advance its strategy to bring the best entertainment experiences to all the screens in our lives, a few strategic organizational announcements were made internally this week by Entertainment and Devices Division, President, Robbie Bach.

1. As a natural evolution of the Interactive Entertainment Business, our consumer products and experiences focused on games, movies, television, and music will now all be part of IEB, led by Senior Vice President, Don Mattrick.

2. In addition, Robbie announced the formation of a new centralized E&D services infrastructure team, which will act as a combined resource across the division.

3. Finally, Enrique Rodriguez has decided to move on from his leadership position running the TV, Video and Music business, and he is evaluating his next opportunity. The TVM first-party businesses run by Craig Eisler (Zune and Windows Media Center) will move into IEB, and Mediaroom, the TV platform business, will become a standalone group within E&D reporting directly to Robbie Bach."

MJ also referred to a catty Mini-Microsoft item speculating that the group will pass the Windows Mobile business back to Windows and Steven Sinofsky.

Microsoft's great hope for the phone business - Windows Mobile 7 - will be released to phone companies in September and could appear on devices by Christmas, according to a report in Taiwan's DigiTimes, which has sources at phone manufacturers.

It's no secret Microsoft will talk up WinMo7 at the Mobile World Congress conference starting in Barcelona on Feb. 15, but the actual release date has been vague - perhaps because Microsoft is giving itself wiggle room to get everything done.

But DigiTimes reports that Microsoft's sharing a roadmap for the software's release with partners.

The software's expected to have an entirely new interface and, as noted in the DigiTimes piece, will incorporate Zune, Xbox Live and the Silverlight presentation platform - implying the phones will support music, movies and games available through Microsoft's online services.

From DigiTimes:

Based on the roadmap, WM7 will be available to Microsoft's handheld hardware partners in September 2010, allowing them to roll-out WM7-based devices in the fourth quarter 2010 or early first-quarter 2011, the sources indicated.

However, only English and common European languages will be available initially, with the availability of the Asian localizations slated for 2011, said the sources, noting that the late availability of the Asian versions has been interpreted by some market watchers as a delay.

Companies building Windows Mobile 7 phones include Samsung, LG, Toshiba, HTC, Asustek and Acer, the report said.

I wonder if any of them will use it for a tablet-sized media/browsing device ...

The closely watched monthly game sales report from NPD is bleak today -- total U.S. retail sales of video games hardware and software were down 8 percent for the year to $19.66 billion.

But analyst Anita Frazier noted it's still been a good decade with more than 250 percent growth in sales at retail since 2000.

Through the year, PC game sales were down 23 percent and overall game software sales were down 11 percent, the firm said this afternoon.

From the release:

Aside from portable hardware, which experienced a 6 percent increase in revenue in 2009, all video game categories experienced declines, with the largest decline coming from console hardware (-13 percent). Console software and portable software both experienced declines of 10 percent, while video game accessories experienced a 1 percent decline.

Sales picked up a bit in December, when a 16 percent year over year increase in console sales contributed to an overall 4 percent sales increase.

One of Frazier's prepared comments:

"December marks just the fourth month of the year where the industry saw an increase over last year. January and February were both up, and since the decline that began in March, only September experienced growth. The big sales this month, particularly on the hardware front, is a positive move for the industry headed into what will hopefully be a recovery year in 2010."

Nintendo sold the most hardware in the month -- 3.81 million Wii consoles and 3.31 million DS handhelds -- while Sony edged out Microsoft, selling 1.36 million PlayStation 3 consoles vs. 1.31 million Xbox 360s.

Nintendo also claimed six of the 10 best-selling games during December. Valve's "Left 4 Dead 2" made the list at No. 9:

For the year, "Call of Duty: Modern Warfare 2" on the 360 was the best-selling game. "Halo 3: ODST" came in ninth, and Nintendo titles dominated the rest of the list:

LAS VEGAS -- It's not going to be the next "Halo" or "Modern Warfare," but I'll bet the retro "Game Room" service the company announced at CES will be a huge hit.

The company built a virtual arcade within Xbox Live stuffed with original arcade games from the '70s through the '90s. To make them accurate, it tracked down original arcade setups on places like eBay and employee homes.

Here's a demo by Frank Pape, a senior director in Microsoft Game Studios, who led the project. (Apologies in advance for the audio quality ...)

It will have at least 30 games, such as "Centipede," when it debuts in March. All can be sampled free. You can buy copies for $3 for Xbox versions, $3 for PC versions or $5 for both. Or you can pay 50 cents to play until you lose.

Players can compete against friends for high score on various games and play head-to-head on multiplayer games on a console in the same room.

Microsoft expects to have more than 1,000 games on the site within a few years.

It seems perfect for phones and Zunes, but the company's not saying anything about mobile versions -- yet.

When a team of sound engineers at Microsoft Game Studios needed sounds of a squealing, skidding and revving Tesla Roadster, they didn't have to look far.

Deputy General Counsel Tom Burt just happens to commute in Roadster No. 203 and volunteered his ride for a day.

Burt filed the details in a great post on Tesla's official blog today. An excerpt:

The team then asked for "longer" squeal segments. We did tight circles just fast enough to keep the tires howling continuously for 30 seconds or so. The team then asked for very faint continuous squeals that they could use in games and simulators to audibly indicate when the edge of adhesion was approaching. More tight circles, with just a bit less [what -- Throttle? No. Accelerator? Awkward. Right foot?] did the trick. ... More right foot and the stock front tires -- before pushing out of the turn -- would eventually yield a loud "shudder" while squealing that the sound team really liked and had not heard before.

Burt said it was "a chance to really burn some electrons, all in the interests of better gaming experiences for the masses."

His tires and brake pads may not last much longer but their sounds will live forever in future versions of "Forza" and "Project Gotham Racing."

Burt was part of this story on Tesla's coming to Seattle.

Here's a sound clip and a few pics of the recording session:

A British game magazine has details of Microsoft's highly anticipated Project Natal accessory for the Xbox, leaked apparently by British game developers and studios who were briefed by the company.

They passed on that Microsoft plans to release the motion-sensing input device and Xbox controller in November 2010, with an initial shipment of 5 million units. There will be 14 games available at launch, and Microsoft is pricing it as an impulse buy in the range of $50 to $80.

The report said the price will be under 50 pounds, or $82, and as low as 30 pounds, or $50.

Either way it's amazingly cheap for a device that recognizes and tracks voices, skeletons and gestures with depth-sensing imagery.

An excerpt:

This is probably a preview of what Steve Ballmer and Robbie Bach will disclose at the Consumer Electronics Show in January.

I'll bet the 14 Natal games will trickle out starting in January, on through the E3 game conference next summer. Likely blockbusters on the card include Bungie's "Halo Reach," sports games from EA and perhaps "Guitar Hero 6."

A Microsoft spokesman gave the usual statement: "We cannot comment on rumors and speculation."

Research firm NPD said video game sales emerged from their rut last month, posting a 1 percent gain, pulled up by the "Halo" franchise, Xbox platform and hardware price cuts.

With 1.52 million copies sold after its Sept. 22 launch, Bungie's "Halo 3: ODST" helped make last month the second best-selling game month since "Halo 3" sold 3 million copies in September 2007.

Sony's PlayStation 3 sales more than doubled sales over the previous year and took the top-selling console spot for the first time, after its price was cut to $299.

But Microsoft's "Xbox 360 platform contributed the most to industry unit and dollar sales as sales of 360 hardware, software and accessories comprised 32 percent of the month's revenues,'' NPD analyst Anita Frazier said in the release.

Total industry sales in the U.S. were $1.28 billion, up from $1.27 billion the year before. But year-to-date sales are still down 13 percent.

Here are the month's top-selling games, according to NPD. Shown are title, platform and units:

Halo 3:ODST, 360, 1,520,000
WII Sports Resort w/ WII Motion Plus, WII, 442,900
Madden NFL 10, 360, 289,600
Mario & Luigi:Bowser's Inside Story, DS, 258,100
The Beatles Rock Band, 360, 254,000
Madden NFL 10, PS3, 246,500
Marvel Ultimate Alliance 2, 360, 236,000
Batman Arkham Asylum, PS3, 212,500
Guitar Hero 5, 360, 210,800
The Beatles Rock Band, WII, 208,600

A few scenes from last night's Halo 3: ODST launch at the EMP. Most surprising was how many people brought kids.

(Issaquah Halo fans Corbin Shannon-Garvey, 11; Diego Garcia, 12; and Benjamin Shannon-Garvey, 8)

We'll be covering tonight's "Halo3:ODST" launch live from the EMP at Seattle Center.

I'll be at the Halorama with Stephanie Clary from our Web team, feeding the stream below.

Triplets from Monroe who showed up around 11:30 a.m. are taking up the front of the line at EMP for tonight's Halo fest.

Jesse Stipek, Dylan Stipeck and Miles Stipek -- all 21 -- staked out their position with friends Bryan Sidbeck, 20, and Kyle Sperry, 20. Another friend is coming this afternoon in a full Master Chief costume.

They're University of Washington students who plan to post video from the event at their Web site, Tricofilms.com.

(From left are Jesse, Bryan, Dylan, Miles and Kyle)

About 20 people were waiting an hour ago.

Expect a traffic jam around Seattle Center on Monday evening: Microsoft and Bungie are hosting a wild Halo fest at EMP to celebrate the release of "Halo 3: ODST" at midnight.

Organizers expect at least 1,000 fans will show up for the event. A spokesman said the event is also intended to mark the launch and celebrate the Halo culture, similar to the Blizzcon event for World of Warcraft fans.

It's first-come, so lines will surely form before the doors open at 6 p.m. The event is open to people 17 or older (or accompanied by a parent or guardian), and attendees will also get free admission to the Science Fiction Museum and Hall of Fame.

There will be Xboxes to play ODST, presentations by Bungie, a Halo costume contest and special t-shirts for the first 200 in the door. The event ends at 11, an hour before the game goes on sale at midnight.

ODST, a prequel to the Halo saga, is one of the most anticipated games of the year.

These guys are already en route for a t-shirt:

Shane Kim, Xbox vice president for strategy and business development, is retiring after 19 years at Microsoft, the company said today. He'll leave at the end of the year, after helping with the transition.

Kim (left) was head of Microsoft Game Studios until last year, when he took the strategy job and Phil Spencer, the studio's European manager, became studio boss.

With Kim's leaving, Spencer is being promoted from general manager to vice president.

The Xbox group is also creating a new chief operating officer position that's being filled by its current chief financial officer, Dennis Durkin. He'll take on operating roles, handling things like pricing sku strategy, as well as business development such as forming new content partnerships.

Kim, 46, graduated from Stanford and Harvard Business School but has no immediate plans for his next move. He'll spend the next four months helping Durkin with the transition, according to an internal memo from Xbox Senior Vice President Don Mattrick announcing the changes.

"Shane's been an instrumental leader in the evolution of Microsoft Game Studios and the Xbox business -- from the early days of Flight Simulator and Golf to the launch of the original Xbox, to the successful launches for two of the biggest entertainment franchises in the industry -- Halo and Gears of War," Mattrick wrote. "Shane's passion for this business and industry runs deep and he will be dearly missed. Having dedicated the last two decades to Microsoft, Shane is eager to make up for lost time with his family and friends."

Microsoft won't comment on the "rumors and speculation," but the latest batch of images look like more than rumors: Images of upcoming ad circulars show Xbox 360 prices falling by $50 to $100.

A pretty convincing Best Buy ad shown at Kotaku lists the 360 Pro for $249 and the Elite for $299.

That was a pretty quick response to Sony's $100 price cut and redesign of the PlayStation3 last week.

Blogs are also seeing info on Xbox price cuts at Wal-Mart and Meijer but still, an Xbox spokeswoman declined to comment this afternoon.

Now it's time for a $200 Wii.

UPDATE: Microsoft confirmed the price drop via official Xbox blog Major Nelson, who said the price drop takes effect Friday. His breakdown of U.S. pricing, old and new:

Xbox 360 Elite was $399.99, now $299.99
Xbox 360 Pro was $299.99, now $249.99 (While supplies last, being phased out)
Xbox 360 Arcade $199.99, stays $199.99

Microsoft's Xbox 360 may finally get some serious competition from Sony this holiday season: Sony just announced that it is introducing a redesigned version of its PlayStation 3 -- the "slim" model that's been rumored for months.

Sony is also lowering the current console's base price by $100, to $299.

The PS3 slim will go on sale in September for $299, with a 120 gig hard drive in its 33 percent smaller case. Microsoft's standard 360 costs $299 and has a 60 gig drive.

Sony also announced at the GamesCom conference in Germany that it will add e-reader technology to its PSP handheld device, and introduce digital comics from Marvel and other publishers in December.

It may take more to reinvogorate sales of any console nowadays, however. Game sales have fallen for five months in a row, including a 37 percent drop in hardware sales last month, according to NPD. The research firm said Sony sold 121,800 PS3's in the U.S. last month, while Microsoft sold 202,900 360s and Nintendo sold 252,500 Wiis.

Pricing - plus an initial lack of games - kept the PS3 a distant third in the race between the current generation consoles. Since it launched in late 2006, Sony sold 8.05 million units in the U.S. through July, compared to 15.73 million 360s and 20.89 million Wiis, according to NPD.

But Sony is upbeat and expects the PS3 will see a 30 percent sales increase from the combination of a lower price, hardware refresh and a strong lineup of games from developers who finally have the hang of the system's unique Cell processor.

"We do expect a substantial lift," said John Koller, director of hardware marketing.

Console price cuts have historically prompted a 40 percent to 60 percent month-over-month jump in sales, according to NPD toy and game analyst Anita Frazier.

But it's also a gamble for Sony, which lost $1 billion in its last fiscal year - its first annual loss in 14 years - and expects to lose another $1.26 billion in the current fiscal year ending in March.

Koller said the PS3 was made smaller by using a new cooling mechanism, a new power supply and shifting to 45 nanometer chips from the previous 65. The size of the external power block is also reduced, and the system uses a third less power, Koller said.

Sony also did away with the power switch on the back, moving its function to the pause/resume button on the front. I'm just glad they added real buttons for pause and eject; on the previous model you just press lit but undefined spots on the case.

A Microsoft spokesperson wouldn't say whether the company plans to cut Xbox prices in response but noted that its entry level model costs $199. (That's without a hard drive; models with a drive start at $299).

"We do not believe today's news will have a significant impact on Xbox 360 sales and our platform will be the entertainment center in the home for long into the next decade," the spokesperson said in a prepared statement. "That said, Xbox 360 is a constantly evolving product and we remain focused on transforming home entertainment with another amazing lineup of blockbuster and exclusive games, new entertainment and social experiences through Xbox Live, and a whole new ways to play with 'Project Natal.'"

Microsoft may have to do something new for the holidays. Its $299 console not only has half the storage capacity as the "new" PS3, it doesn't have a Blu-ray drive like Sony's console.

Not that many people use all the storage (or Blu-ray ...) but the PS3 could look better to comparison shoppers. It also looks like a bargain compared to the $399, 120-gig Xbox 360 Elite model.

Mr. Slim's ports, shown in closeups:

Microsoft plans to launch a new streaming music service by the end of the month, an MSN executive told England's Telegraph newspaper.

At first I guessed it would be a free, ad-supported version of the Zune music service, but a spokesman said it's a separate service that's not emanating from the Zune group.

It's also going to be tested first in the U.K., with no word yet on a U.S. launch.

Here's a supplement to today's column on Bungie and "Halo 3: ODST" - edited excerpts from an interview with Bungie President Harold Ryan last week at the company's Kirkland offices.

Ryan has more to say about the Xbox "Project Natal," competition for Halo and Bungie's independence from Microsoft. He also touched on Halo 4 - a new game called "Reach" that's coming next year and already being played within Bungie.

Microsoft's finally releasing it's very cool new "Kodu" game-building tool. for the Xbox on June 30.

It's going to be sold for $5 or 400 MS Points on the Xbox Live Community Games channel.

Kodu is set of tools that kids or anyone else can use to quickly and easily build games that play on the Xbox 360.

Microsoft's began showing the technology, an advanced research project initially called Boku, last fall and highlighted at the Consumer Electronics Show in January but withheld release details. The company's planning to announce pricing and specifics about its release later this week.

Lots of games nowadays let players customize and build new levels. Kodu feels like a game but it's much more powerful. It lets you create games using just an Xbox controller, manipulating icons and customizing characters, play and terrain. A screenshot of a carousel for selecting actions:

Kodu's actually a new visual programming language that introduces programming concepts to kids, while making it easy for them to build their own Xbox games. I wouldn't be surprised if older players get into Kodu as well, especially if Microsoft adds ways for people to share and perhaps even sell their Kodu games.

Inspiration came from tools such as the HyperCard program that Apple released in the late 1980s, according to Matthew MacLaurin, a Microsoft researcher behind Kodu. He worked at Apple from 1988 to 1994.

After MacLaurin demonstrated the system recently in Seattle, showing how easy it was to build and customize a racing game, I challenged him to build a shooting game in two minutes or less.

He did, producing a flying saucer shooting game with a balloon boss and rockets that leave realistic smoke trails: