By Malathi Nayak and Bill Rigby
SAN FRANCISCO/SEATTLE (Reuters) - Microsoft Corp is set to make a splash this week with the eagerly awaited unveiling of its new Xbox game console, eight years after the last version, as it seeks a larger share of the $65 billion a year global computer gaming industry.
But the small device faces some big competition from the PlayStation 4 by Sony Corp and the Wii U by Nintendo Co Ltd in a shifting market.
Gamers are gravitating to online play - suggesting the hey-day of console games are over - while Microsoft wants its sleek new toy to finally cross the bridge to the mainstream and become the family's entertainment center.
"Core gamers are very hungry for a new machine but the difference between 2005 and now is that the stakes are so much higher," said Ryan McCaffrey, executive editor at entertainment website IGN.com, harking back to Microsoft's last Xbox release. "The entire Xbox experiment from Microsoft was for it to be the center piece of your living room."
To that end, industry-watchers are expecting a raft of improvements from the new Xbox, when Microsoft unveils it at its Redmond, Washington, headquarters on Tuesday, from closer integration with the TV and link-ups with mobile devices to access to new and even exclusive content.
Console gaming still takes the lion's share of a growing gaming market - about 42 percent of the $65 billion world market, according to Microsoft. But playing games on smartphones and tablets, or as an offshoot to online social networks, is gaining ground fast.
Console sales have been in decline for the last four years, chiefly because of aging devices, but the first of the new generation of machines has not reignited the sector.
Nintendo's Wii U, launched in November, had sold only 3.45 million units through the end of March, well below the company's initial forecast of 5.5 million. Hopes for Sony's PS4, teased in March, are low key.
"The next wave crest isn't as high as the previous one," said Lewis Ward, research manager at International Data Corp, who calculates that about 250 million Xbox 360, Sony PlayStation 3 and Nintendo Wii units were sold between 2005 and 2012.
"I do think that consoles as a product category have peaked and the next gen devices won't match those totals," he said.
The Xbox itself is not a key financial factor for the world's largest software maker. Its Entertainment & Devices unit is set to break $10 billion in sales for the first time this year, but that's half the sales of its Windows unit, and a lot less profitable, averaging less than 15 percent margin compared to 60 percent or higher for Windows or Office.
The company has more than 46 million members who subscribe to its online gaming and digital entertainment service Xbox Live, but that's still a fraction of the people who pay for its software.
However, the Xbox is still a key weapon in Microsoft's strategic battle with Google Inc, Apple Inc, Amazon.com Inc and others for a central place in consumers' lives.
"This (the new Xbox) is of massive importance to Microsoft. It is a piece of a larger war for the consumer that it is battling. They want to be fully integrated with the consumer whether it's in the living room or mobile," said P.J. McNealy, CEO and founder of Digital World Research. "Arguably the battle against both Apple and Google for dominating a consumer's time share more so than taking on Sony and Nintendo directly."
That means Microsoft will be aiming for many markets at the same time, from the core and casual gamer to the TV watcher and music fan.
To do that, industry watchers expect Microsoft to integrate the new Xbox much more closely to the TV and cable or satellite box, perhaps allowing users to change channel or buy movies with a wave of the hand through its motion-control Kinect sensor. They also expect to hear more about SmartGlass, Microsoft's app that lets you link an Xbox to a tablet or smartphone.
Users can already get Netflix through the Xbox, and Microsoft recently started its own studio to produce exclusive content, meaning the new device is a gateway to much more than games.
"I think they're going to try to have their cake and eat it too - they will try to get casual people for entertainment while keeping the hardcore gamers interested," said McCaffrey at IGN.com. "They want their console on all the time, whether it's a mom watching Amazon video, the son playing a game and the dad watching (Major League Baseball) TV on another app - that's their goal."
(Additional reporting by Edwin Chan; Editing by Lisa Shumaker)