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Microsoft's latest gadget is stumbling in more ways than one. Supply problems, mediocre software sales, and even hardware flaws are making some gamers think twice. But there's hope--here's what Microsoft needs to do to make the Xbox 360 the leading next-gen console.

Microsoft's latest gadget is stumbling in more ways than one. Supply problems, mediocre software sales, and even hardware flaws are making some gamers think twice. But there's hope--here's what Microsoft needs to do to make the Xbox 360 the leading next-gen console.

#1 Redesign the Xbox 360 hardware by early 2007

Counting the AC adaptor, the video cables, and one wireless controller, the Xbox 360 weighs in at just under twelve pounds. Twelve pounds! That's a fully-loaded tackle box, not a futuristic gaming system. As Apple proved with the iPod, sleek is in.

Which makes Microsoft's plans to release an external HD-DVD drive all the more ludicrous: don't these guys realize how dangerously huge and clunky the Xbox 360 already is? Rather than release a niche-targeted external HD-DVD drive that will overburden an already monstrous piece of equipment, Microsoft needs to redesign the 360 itself as quickly and efficiently as possible. Early 2007 should prove to be the perfect time frame, especially since a PS3 delay is looking more and more likely.

Top priorities for a redesigned Xbox 360 (we'll call it "Xbox 360 NEO"): adding an HD-DVD drive, or at least a slot-loading DVD drive; integrating that ridiculous "power brick" AC adaptor into the main chassis; adding an embedded hard drive (ideally a 4 GB flash RAM microdrive); smoothing out known hardware flaws and overheating problems; and finally, slashing the weight of the whole system by at least 25 percent. Microsoft shouldn't be shy about boosting the price for the Xbox 360 NEO, either: $450-600 is a reasonable introductory price for a streamlined, enhanced Xbox 360, especially if it has HD-DVD capabilities. And to keep price-sensitive players happy, Microsoft could always keep a supply of original Xbox 360 units on hand.

The logic behind a total Xbox 360 overhaul is simple. For starters, the current design sucks. And gadget freaks have proven they'll buy the same gadget again and again if it's made smaller, sleeker, and more powerful (see the iPod Nano, the slimline PS2, and raging preorders for the Nintendo DS Lite). This move will put Microsoft on even technological footing with the PlayStation 3 juggernaut. But best of all, it will make the Xbox 360 viable for the long term--it'll be sleek, small, and powerful enough to compete with all challengers. Microsoft should embrace the redesign and capitalize on in it as a key way to hobble Sony and the PS3.

#2 Release the ultimate game--a crown jewel for the Xbox 360

For the first Xbox, Halo 2 was clearly the ultimate killer app. Not only was it a technological titan and a blast to play, it was a brilliant demonstration of the potential of Microsoft's budding Xbox Live online gaming service. Halo 2 embodied every one of the unique strengths of the original Xbox. It was more than the Xbox poster child--it WAS the Xbox.

As of early 2006, the Xbox 360 still doesn't have its own Halo 2. Sure, Perfect Dark Zero and PGR 3 have neat graphics and slick online modes, but we've seen games like those before. Even the mind-blowing Elder Scrolls IV: Oblivion doesn't pass the Halo 2 test because, as impressive as it is, it has no Xbox Live online mode and it's also available on the PC. Oblivion is a fantastic game, but not the coveted Xbox 360 crown jewel.

What Microsoft needs is an exclusive game that shows off every one of Xbox 360's unique hardware and interface strengths. Halo 3 alone won't do it--this needs to be something unique and earth-shaking, something we haven't seen yet. Something signature. Something undeniably Xbox 360.

So what are the Xbox 360's unique strengths, you ask? Simple. The Xbox 360 crown jewel should:

• Tap into the strengths of the Xbox 360 controller. Shooters, RPGs, and action titles are in by default. Geeked-out racing games and digital pets probably aren't.
• Make extensive use of Xbox Live, not only as a matchmaking service but as an advanced communication tool, a distribution system, and a way to hang out with friends. A tightly-integrated four-player cooperative mode would satisfy all three requirements, and would blow away similar attempts from Sony and Nintendo.
• Include endlessly replayable and customizable content. This game should offer players an endless stream of new assets and territory to explore, via the Marketplace. Think Diablo II or World of Warcraft on a grander scale.
• Exploit the Gamer Card. The perfect Xbox 360 game would make your profile, gamerscore, and reputation relevant in a gameplay setting. Think of a Battlestar Galactica game in which you have to identify and assassinate secret Cylon agents (other players) masquerading as friendly soldiers. Now THAT'S next-gen.

Without a crown jewel title, Xbox 360 is just another wannabe next-gen system that costs $400 and weighs too much. Microsoft can't afford to let that happen. Innovation is key.

#3 Lock down Grand Theft Auto 4 as an Xbox 360 exclusive

Sony's deep, dark secret is that the PS2 was suffering from an identity crisis before Grand Theft Auto 3 came along. Microsoft needs to exploit that Achilles' Heel by buying exclusive rights to the next-gen Grand Theft Auto game at any cost--and we mean any cost. This move will cripple Sony and buy Microsoft more time.

Though pricey, such an arrangement will ultimately prove to be a necessary sacrifice. Earning an exclusive on Grand Theft Auto 4 will do more than sell millions of Xbox 360s--it will send a message to gamers that Microsoft is serious about competing in the gaming market. As a compromise, Microsoft could pay for an exclusive six-month lead on the Xbox 360 version of GTA 4. But this isn't an ideal solution, as many gamers would probably prefer to wait for the inevitable, enhanced PS3 release anyway.

In the end, there's no getting away from it: Microsoft needs GTA4, and money should be no object. In this cutthroat industry, you've got to pay to play...let alone win. Time to open up that checkbook, Bill and Steve.

#4 Turn the Xbox 360 into the MMO console

It's a well-known fact that the Xbox and Xbox 360 excel at first-person shooters. This is no surprise, given the FPS-friendly controller design. So it stands that Microsoft doesn't need to apply any additional pressure to get developers to create more shooters--killer FPS games are going to blossom one way or another.

Instead, Microsoft should focus its energy on convincing publishers to hop onto the Xbox 360 MMO bandwagon. For an MMO publisher, the Xbox 360 is a dream system for two reasons. First, Xbox Live is already a mature, well-maintained network--an asset Sony has only begun to build for the PS3. Second, Microsoft has the advantage of owning over 90% of PCs in North America thanks to their Windows operating system. If Activision released a Spider-Man 3 MMO on the Xbox 360 and the PC simultaneously, the combined community would dwarf most medium-sized PC-only MMOs in a heartbeat.

It will be years before Sony can offer MMO publishers these kinds of opportunities. And Microsoft wins whether the MMOs succeed on the PC, the Xbox 360, or both. Those are unbeatable odds, but the advantage won't last indefinitely. But there's a catch--Microsoft needs to start convincing publishers now.

Now for the bad news. At the moment, Microsoft is in outer space when it comes to MMOs. They aren't making any friends with the Guild Wars guys--NCSoft, makers of Guild Wars and countless other MMOs, is openly criticizing the Xbox Live business model. That's no good--fix it.

#5 Embrace lower game costs and digital game distribution over Xbox Live

The trickiest commandment, but probably the most important. Disc-based games are on their last legs, and that comes from Peter Moore himself. With hard drive prices plummeting and BitTorrent growing by the second, it's only a matter of time. Why not forge lucrative new territory and save the industry at the same time?

In the short term, Microsoft should trim their licensing costs so that more publishers can afford to charge $50 and even $40 for new Xbox 360 titles. Publishers are hurting more than ever, and they need all the help they can get to continue churning out games.

In the long term, Microsoft should take the initiative in creating a standardized, copy-protected digital distribution model for games. If it's good enough, Microsoft could sub-license this system to other publishers, and eventually Nintendo, Sony, and any other major entertainment companies who enter the video game fracas. That would put them in a position to bow out of the competition by the time PlayStation 4 rolls around--by that point, they'll have won the sweetest plum in digital distribution and security licensing deals.

It's a big, bold plan, but Microsoft tends to excel at the biggest, boldest plans--see Windows, Internet Explorer, and the optical mouse.

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