The service signed up 350,000 people in three months.
SEATTLE (AP) -- Microsoft Corp.'s Xbox video-game business is bleeding hundreds of millions of dollars. Its boasts of late have been along the uninspiring lines of "We're Number 2!" in sales of its game consoles.
But Xbox Live, Microsoft's online video-game service, has surpassed expectations with 350,000 subscribers signed up just three months after launch. And the rapid increase has helped the company break new ground in the industry, a coup that has competitors on the defensive, analysts say.
"The success of Xbox Live has caught everyone by surprise, including Microsoft," said Matt Rosoff, an analyst with Directions on Microsoft, a Kirkland, Wash.-based independent research firm that specializes in Microsoft.
It is putting pressure on Sony Computer Entertainment's PlayStation, said Charlene Li, principal analyst with Forrester Research, as well as Nintendo, which lags even further behind Sony in its online offerings.
A losing proposition
Microsoft's foray into online gaming has not been cheap.
The company loses money on every Xbox console it sells. At $199 a unit -- already $100 less than its debut price in November 2001 -- the consoles may soon drop in price even more, some analysts said.
The losses only deepened with Microsoft's new Xbox Live service, which connects gamers around the world who have a broadband Internet connection and subscribe to the service. For $49 -- the price of a popular console video game -- customers receive a headset to talk with one another as well as a year's subscription.
The company doesn't disclose how much it spends on Xbox Live, but said last year it will spend $2 billion through 2007 on the Xbox and Xbox Live ventures.
Microsoft rolled out the service in North America last November, then in Japan in January. It launches in Europe next week.
The Xbox crew's challenge now as it seeks more customers is to appeal to people who are not hard-core gamers -- with games that are big hits. Microsoft has fewer titles available for Xbox than Sony does for its $199 PlayStation2.
Scott Henson, Xbox director of platform strategy, declined to comment on rumors Microsoft is looking to acquire video game publisher Sega Corp. But he did say that Sega's sports games are among the most popular for Xbox Live.
Microsoft's ability to sign up 350,000 subscribers -- and its message that Xbox Live is synonymous with the "next-generation" entertainment platform -- is already getting noticed by competitors, Rosoff said.
He noted that Sony is already responding, increasingly talking about the next console it will deliver, PlayStation3, due out in 2005.
"They don't want consumers to start viewing Playstation2 as an old-fashioned or legacy device," he said. "Sony's trying to change the conversation."
Sony PlayStation2 sales still dwarf Microsoft's, with analysts estimating more than 50 million units sold around the world since the October 2000 launch.
Microsoft has reported console sales of about 9 million since November 2001. Nintendo figures from last September showed sales of 6.7 million GameCube consoles -- although it projects sales near 10 million by March.
Sony and Nintendo say they are planning to expand their online offerings but declined to offer specifics.
The two already sell adapters that can connect their consoles to the Internet for online play -- Sony reports about 500,000 sold; Nintendo did not immediately make sales totals available.