In a statement issued Friday, Microsoft revealed what the rest of the industry had already suspected: Sales of Xbox, the software giant's powerful video game system, are much worse than expected. Microsoft said that sales barely hit the bottom end of its previous forecast, and the company alerted suppliers that it's lowering sales projections again for 2003 and, as a result, will buy fewer parts.

"At our \[second-quarter\] earnings announcement, we reported that we will end the fiscal year within the sales range originally forecast, but in the bottom half of that range, and for that reason we have asked suppliers to make applicable adjustments," the company reported. In an October earnings call, the company lowered its total Xbox sales forecast to 9 million to 11 million units by the end of June 2003. The company originally expected to ship that many units by the same point in 2002.

Microsoft informed its Xbox parts suppliers not to expect any orders in the first half of 2003 so that the company can deplete existing console supplies. The company will alert suppliers about second-half orders sometime in the second quarter. NVIDIA, a Microsoft key partner that makes the Xbox's video controller, will likely suffer the most. NVIDIA will probably ship just 5 million video chipsets to Microsoft this year, down from its original forecast of 8 million units. Microsoft and NVIDIA are in court over a disagreement regarding the price Microsoft is supposed to pay per unit for the video controllers. Currently, Microsoft represents about 10 percent of NVIDIA's business.

In the most recent quarter, Microsoft's Home and Entertainment Division, which is responsible for the Xbox, lost $348 million on revenues of $1.28 billion. Many analysts and news reports point out that Microsoft loses money on every Xbox unit it sells, but that practice is common in the video game industry. Nintendo and Sony--the company's competitors in the heated battle for the lucrative video game market--also lose money on video game console sales. All three companies theoretically make up the difference on game title sales. As a result, Microsoft has been purchasing independent game makers in an effort to bolster the ranks of Xbox-specific titles. Currently, Microsoft is rumored to be talking to Vivendi Universal Games about buying its video game unit.