"What's happening here is we've designed the first game console that really takes it into what's going on on the internet, the realism that we can provide, the multi-player gaming, the fact that we've got a disk so you can download game updates," he told the BBC's World Business Report.

What's in the box?

600MHz CPU 300MHz custom-built graphics processor 64Mb memory 4x DVD 8Gb hard disk 64 audio channels

"It's a product that when it comes out in the fall of 2001 is going to define a whole new experience.

"The new Microsoft strategy talks about multiple devices and one of those devices is going to be in the living room and very entertainment focused and that will be the X-Box."

There have been rumours within the industry for some months that Microsoft was poised to move into the sector.

The X-Box will put it into direct competition with market leaders Sony, who have just launched Playstation2.

But although the companies have worked together in the past, Bill Gates is clearly relishing that particular challenge.

"I think our work will spur them on and their work will spur us on. What it means for consumers is really quite incredible. Certainly the game developers are thrilled to have these two companies building the world's best game consoles," he said.

Shares jumped

Mr Gates spent Friday giving further details of the project, at a game developers' conference in California and by video link to a news conference in Japan.

It was also unveiled - although still with a certain amount of secrecy - at presentations in other countries.

Sony's Playstation2 has been the talk of the industry for months

The X-Box is expected to sell for $299 and be on the market in North America and Japan in about 18 months' time.

It had been reported that AMD was providing the processor, but on Friday Intel confirmed that a processor based on the Pentium III range would be used.

The chip is a joint development with Nvidia, whose shares rose more than 35% this week on speculation of their involvement.

Microsoft has had a couple of previous attempts at breaking into the consumer market, but with only limited success.

It has generally preferred to supply its software and let other manufacturers fight it out.

But it is no doubt aware that sales of games for PCs have dropped off in the past couple of years while video games are growing.

"Microsoft have hitherto dominated the workplace, they've dominated the office," explains games analyst Nick Gibson of Durlacher.

Microsoft is already a major player in games software

"They now want to dominate the home - they see it as one of the key areas for new services and products. It's a $17bn opportunity - this is an absolutely colossal market."

Computer analyst Jerry Sanders believes the emphasis is shifting from PC to video games.

"The chip that is going to be in this console is 20 times faster than the chip in the PCs, so you are going to get a better game on the console than the PC," he says.

He also believes that with families making more use of PCs at home, parents will not want children filling the hard drive with games, so will buy them a console.

Guns blazing

Certainly the hype surrounding the launch in Japan of Playstation2 last week has dominated the sector.

In fact, analysts say many computer companies and software makers have been waiting to see how Playstation performs before committing themselves to Microsoft's new project.

If battle is to be joined between Sony and Microsoft, other players in the market such as Sega and Nintendo will have to fight hard to retain their share.

Nick Gibson says Microsoft will come out with guns blazing.

"Part of their strategy could be brute force. They are going to be committing an absolutely massive marketing budget to this," he says.

"In fact, they are talking about this being one of the biggest product launches they have ever done."

Long term potential

And the X-Box is also a product for the future, he believes.

"They are initially positioning it as a games console but it has both a hard drive and high speed network access, which means the potential in the long term is expansion into the music market and possibly the video market."

With the launch still a long way off, Microsoft have the time to make sure everything is just right.

They also have the impetus of being at the forefront of yet another hugely lucrative technological development.