Microsoft's videogames have had more fits than starts. Its console, the two-year-old Xbox, loses something like $100 per unit sold, or a billion dollars a year. Xbox had a disastrous launch in Japan and still runs far behind Sony's PlayStation 2 in worldwide sales. But the game's not over. Witness the Electronic Entertainment Expo, or E3, the gaming industry's annual confab in May. For the goateed and backpack-toting attendees, E3 is a big, honking sneak peek at the next killer games, and Microsoft had the best of them all: Halo 2, the sequel to its 2001 sci-fi action masterpiece. People waited hours in line just to see the eight-minute demonstration. "It's one of our most ambitious projects," says Robert (Robbie) Bach, the Microsoft senior vice president in charge of Xbox. "It's a title that will sell anytime, anyplace." But it will play only on Xbox. And if you want to blast away online with far-flung friends you have to pay $50 a year to subscribe to Microsoft's new gaming network, Xbox Live. Halo is just the first of several new Xbox and Xbox Live exclusives, including sure hits such as Doom 3, Project Gotham Racing 2 and Counter-Strike. All of them, Bach says, play better online.

"This generation we were statistically out of the playoffs before we even laced up our shoes," concedes J Allard, vice president in charge of Xbox Live. "Next season, there won't be an 18-month head start. We'll be neck and neck right out of the gate, and Xbox Live will give us a huge online head start."

The Xbox Live network launched in November and passed the 500,000 subscriber mark in seven months, beating, by 80,000, the number of people registered to play PlayStation 2 games online, despite the fact that Microsoft has sold only 9.4 million Xboxes to Sony's 51 million PlayStations. Nintendo, with 9.6 million GameCubes sold, has limited online ambitions.

Microsoft has a habit of herding customers into its own technology corrals. Xbox Live is no exception, with Microsoft reaping nearly all of the financial benefits and exerting total control over the game network. PlayStation throws the gate open to allow any game developer to run its own player network. In May Electronic Arts, the world's biggest game publisher, shunned Microsoft and announced that through March 2004 its bestselling sports games will be playable online only with Sony.