Microsoft's first generation Xbox was a technological tour-de-force compared to rivals such as Sony PlayStation 2 and Nintendo Game Cube, and recent advances like Xbox Live and Halo 2 have only increased Microsoft's technological edge. There's just one problem: Microsoft loses money on every single Xbox it sells. So when it came time to design the Xbox's successor, the Xbox 360, the company knew it had to offer better graphics, performance, and games than the competition. But it also had to reverse its financial fortunes at the same time. How will it work? According to Microsoft, the Xbox is already on the road to profitability. The unit responsible for the Xbox at Microsoft posted its first-ever quarterly profit in December 2004 (though it was back in the red in the next quarter). Every component in the Xbox 360 has been picked for its value and expectation that component prices will fall over time. And the division has strict sales, revenues, and profit goals. Finally, Microsoft has cut back on internal game development, since most of its own Xbox titles were poorly received. So will it work? We'll know in about a year.